In the Forex market, the term “PIP” or Point In Percentage is defined as the unit of measurement for the smallest change in the value of a currency, or the smallest exchange rate fluctuation in a currency pair.
This is how traders measure their profit or losses in Forex. So, if you are planning to speculate in Fx marketplace, it is very important that you learn everything there is to know about the Fx PIPs.
What Exactly Is The Value Of One PIP?
The value of currency in Forex trading is given in PIPs, and 1 PIP is equivalent to 0.0001, 2 PIPS are equivalent to 0.0002, and so on. One PIP is the smallest percentage point change that an exchange rate can make. So, if you have bought United States Dollar (USD) with Swiss Franc (CHF) at 1.2475 and sold it at 1.2489, you’ve made 14 PIPs.
In general, most currencies are usually priced to four numbers after the decimal point. However, not long ago, the majority of Fx Brokers started to quote in five decimals, essentially giving us traders more transparency.
Actually, this fifth decimal point is called a pipette, and, as for now is the smallest change a currency is able to make. Therefore 10 pipettes would equal to 1 pip. Hence, a five spread for EUR/USD is 1.2530/1.2535 – with the four decimal broker, and 1.25300/1.25350 – with the five decimal broker.
In all the major currencies, it is only the price of the Japanese Yen that doesn’t have four/five numbers after the decimal point. For example, let’s consider the exchange between United Stated Dollar and Japanese Yen. In USD/JPY, the price is usually given in to two decimal points, so the exchange between USD/JPY will look like this: 114.05/114.08. This quote has a three pip spread between the buying and the selling price.
What Are Spreads?
In the Fx marketplace, the spread is defined as the difference between the bidding price (buying price) and the asking price (selling price). In order to have a currency pair, there must be two prices. The spread is simply the difference between what the market maker offers to buy from the trader, and what the market maker offers to sell to the trader.
Therefore, if a trader buys any currency from the market and sells it immediately making no change in the exchange rate, he or she will lose money. Why? Because, the amount spent in buying the currency will be more than the amount received in the selling of the currency.
Determining the Fx PIPs Value
There are actually three important factors affecting the value of each PIP – the exchange rate, the size of the trade, and the currency pair being traded. In this light, the change in one factor can have a serious effect on the monetary value of the open position.
For example, given that a $500,000 trade involving the United States Dollar and Swiss Franc (USD/CHF) is closed at 1.0192 after netting us 50 pips. To determine the amount of profit made in USD, you will have to look at the following procedure.
First, find out the number of CHF that each PIP represents as follows:
500,000 x 0.0001 = 50 CHF per pip
The next step is to find out the amount of USD that each PIP represents as follows:
50 ÷ 1.0192 = 49.05 USD per pip
Now, to find out the total profit that was achieved in USD, you will have to multiply the total amount of PIPs captured by the value of USD per PIP as follows:
50 x 49.05 = $2452.50 USD profit.
The Bottom Line
During the Market hours the Fx PIPs are never in a stable state; they keep on changing according to the market fluctuations.
Gladly for us, this time-consuming calculation, as to how determine the value of a PIP, is done automatically by the electronic trading platforms.
Also, most Brokers have a table of PIP valuation on their website for a particular currency pair.
Life, of a trader, is good in a 21-St Century!