In this video we are going to talk about “PIP”… A “pip” is the smallest measurement for a currency rate, and it is usually the 4th decimal for all major pairs except for JPY, which uses the 2nd decimal…
For example, if the exchange rate for USDCAD moved from 0.9800 to 0.9802, it means that the rate moved up 2 “pips”.
In the case of JPY crosses, such as USDJPY, if the market moved from 80.10 to 80.12, it means that the market also moved up 2 pips.
Some Forex brokers offer fractional pip, so you get a 5th decimal (0.98023 for USDCAD) on USD pairs and 3rd decimal (80.123 for USDJPY) on JPY pairs, it is basically the same thing but with slightly more precision…
PIP stands from “Percentage In Point”, because it is usually 1/100th of a percent of the currency quote, or one basis point… I know all of these terms and acronyms could be confusing, just think a pip is more or less equivalent to a tick in the stock market…
A pip value is different depending on the pair traded. As a rule of thumb, any pair ending with USD, such as EURUSD, GBPUSD, or AUDUSD etc… equals to $10.00 per pip for a standard lot contract of $100,000. Don’t worry, I will cover what is a Standard Lot and other lot sizes in my future videos…
But if the currency pair does
not end with USD, then here is the formula to calculate Pip value.
(PIP / QUOTE) X CONTRACT SIZE
For instance, USDJPY is trading at 80.15, so one pip, or 0.01 as the 2nd decimal, divided by the quote rate, then multiply it by the lot size, which is in USD $100,000…
(0.01 / 80.15) X $100,000 = $12.47 per each pip…
What if you the pair does not have USD symbol in it, such as EURGBP? Well, we need to first calculate how much quote currency it requires, then convert that into USD… Please watch my video on Currency pairs for more information on Base and Quote currencies.
So for this example, EURGBP is at 0.8920, or for every EUR you get 0.8920 GBP. To figure out PIP value, we will use the same formula of (PIP / QUOTE) X LOT SIZE
(0.0001/0.8920) X EUR 100,000 = 11.21 Euro Per Pip
And since the exchange rate for EURUSD is at 1.4600, or 11.21 EUR = $16.37… therefore each pip in EURGBP pair equals to $16.37 USD (in a standard $100,000 contract).
Of course you don’t need to calculate pip value manually, your broker trading platform will do that for you, you just need to concentrate on the market and trade…
If you like this tutorial, please watch the video and leave your comments below and don’t forget to check out our other videos on the Forex Terminologies series. Signup below to be notified of new video releases!
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