If you are new to Forex then chances are you have frowned at some point in your training; grit your teeth and asked, what the hell is a PIP?
Well, in Forex a pip (percentage in point) is a measure of value change between two currencies.
An easy to understand example is when you are trading Forex in the EUR/USD pair and your chart moves from 1.2500 to 1.2501.
Look at those figures. Are they the same?
This movement has created a difference of 0.0001 units.
Now this 0.0001 change is what’s referred to as a PIP.
It gets interesting from this point.
Did you notice something else?
This pair is quoted in 4 decimal places which is a standard thing in Forex.
However, Japanese yen pairs are exceptions – often quoted in 2 decimal places.
A USD/JPY will be quoted as 104.22 (2 decimal places) and if it flicks to 104.23 then the 0.01 difference becomes the PIP.
Note – a pip can either be – USD/JPY this 0.01 or EUR/USD this 0.0001
What is a Pipette?
Often times you will find yourself on a trading platform which quote currency pairs beyond the standard 4 and 2 decimal places. A good example is XM Forex
Those 3rd and 5th decimal places are what we call pipettes or FRACTIONAL PIPS.
An Example of such is a EUR/USD pair moving from 1.11655 to 1.11656. That .00001 flick is the PIP.
So to speak, a Pipette is a tenth of a PIP
How to Calculate The Value of a PIP in Forex
Because Pips determine how much a trader makes per lot traded, it is important to learn how to calculate them.
And by calculation I don’t mean doing it manually but using PIP value calculators.
Just so you know, most brokers have these tools on their platforms – making the task easier so you can mostly focus on what’s important, trading.
Use the XM PIP Value Calculator here
substitute values on the available spots to determine if investing on your preferred pair is worth the risk.