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Did you know that doing math can make you money? 💰
Just a little bit of math, don’t worry.
More investors than ever before are taking an interest in forex trading. And we can see why – this dynamic, 24/5 market is teeming with activity, and the woes of 2020 have seen most of us scramble to earn additional income.
In fact, forex trading has seen an incredible 300% increase since the start of the pandemic. Isolation, more free time, and economic uncertainty have coalesced into a driving force—one that is obviously making everyone crazy about forex trading. 📈
Forex trading gets a bad rap—but that’s mostly due to investors who rush in haphazardly without the proper know-how. Basically, this means you just have to get the basics right, and you’ll already be way ahead of most of your competition.
Since we want to help you become a successful forex trader, we’re going to give you a helping hand. You’re still going to have to do most of the legwork. But when it comes to the basics, this guide will teach you how to read and calculate all this forex stuff in no time.
Pips are a fundamental concept in forex trading, but at least they are not as complicated as they might seem at first. Sure, there’s some math involved, but it’s really not very difficult to understand how it all works.
Ready? Let’s jump in! 🤓
Let’s begin with the very basics. Pip is short for percentage in point or price interest point. Now that etymology is out of the way, what does pip actually mean?
Well, to put it in the simplest of terms, a pip is a unit of measurement. It represents the change in the value of a currency pair. A single pip is equal to 0.01%, or 1/100 of a percent. Think of it another way – a pip is one percent of one percent – otherwise known as a basis point.
If you haven’t heard by now, the U.S. dollar is the most traded currency in the world. It is found at either end of 88.3% of global trades. In practice, this means that for most USD-related currency pairs, a pip equates to $0.0001.
And against all odds, the dollar is performing quite well even in the midst of the pandemic and political strife in the U.S. – something that you should definitely keep in mind when trading currencies.
Pips are quoted to the fourth decimal place, as shown in the image above. A single pip is equal to 0.0001 in the price quote. Looking at the image above, if the exchange rate were to move from 1.2182 to 1.2187. we would be looking at a change of 5 pips.
Currency pairs that include the Japanese Yen are an exception to this rule – in that case, pips are quoted to the second decimal place. In that case, a pip is equal to 0.01 in the price quote. If the exchange rate for USD/JPY were to change from 103.69 to 103.71, that would constitute a change of 2 pips in this case.
Pips represent the price movements that go on with currency pairs – and seeing as how forex trading works off the price differences in two currencies, understanding pips is vital – no matter which strategy or method you prefer with forex trading.
There’s also another reason why pips are very important – and that is leverage. Leverage is the amount of money that you can use for forex trading – but that you don’t actually own. Essentially, it is the use of borrowed money for trading.
And forex brokerages are known to offer quite a lot of leverage. What this translates to is that you can easily open very large positions. And when you’re trading with a lot of borrowed money, the difference a single pip can make is striking – as it can either bring in an enormous amount of profit or a complete wipeout.
Now that we’ve covered the fundamentals, let’s take a deeper look at how pips function. In this next section, we’ll be covering a couple of important topics – how to calculate pip value, what are pipettes, and we’ll also cover a few notable exceptions to the way things usually function.
At the end of this section, we’ll include a small quiz to help you check whether or not you’ve gotten the hang of it all. Don’t worry if you don’t ace it on your first try – there’s no rush, and you can always try again.
Let’s begin with pipettes. They’re simple enough and will give us an opportunity to revisit some of the stuff we’ve already talked about.
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Pipettes, also called fractional pips and points, are a unit of measurement that is equal to one-tenth of a pip. Put in other terms, pipettes are what you get when you quote prices to an additional decimal place.
What this means in practice is that most currency pairs are quoted to the fifth decimal place, while pairs involving the Japanese Yen are quoted to the third decimal place.
To give you an example, let’s take the USD/CAD currency pair. If the exchange rate changes from 1.2785 to 1.2786, it has changed by one pip. If it changes from 1.27851 to 1.27852, it has changed by one pipette or point.
As for the Japanese Yen, if the exchange rate moves from 103.699 to 103.704, it has changed by five pipettes or points.
So, should you concern yourself with pipettes? Not really, at least not in the beginning. Although pipettes offer more transparency regarding price and allow you to more accurately see price changes, they still represent a tiny amount of money in most cases.
Especially if you’re a beginner, you’ll be much better off focusing on strategies for trading forex, to understand how you can use the other elements of forex to your advantage.
Now that we’ve dealt with the basics, let’s move on to one of the more crucial questions when it comes to pips. How do you calculate the value of a pip?
This, to no one’s surprise, will involve a bit of math. But not too much – and we promise that we’ll keep it as simple as we can.
Currency Pair | Exchange Rate | Lot Size |
---|---|---|
USD/EUR | 0.8200 | 10,000 |
one |
---|
First of all, you’ll be looking at the value of a pip for a specific currency pair. To get that, you’ll need to take 0.0001 and divide it by the current exchange rate.
For our first example, let’s take USD/EUR. As it stands now, the exchange rate for USD/EUR is 0.82. So the math looks like this: 0.0001 / 0.82 = 0.00012195121 USD. That’s the value of a single pip in this case
But that isn’t the end of the story. Now we have the value of a single pip – for a single unit of currency. But you won’t be trading a single unit of currency – instead, forex traders use lots.
Lots represent a certain amount of currency – standard lots are 100,000 units, mini lots are 10,000, and micro-lots are 1,000 units. Nano lots, which are 100 units of currency, also exist but are rarely used.
To get an actual idea of how the change of a single pip can affect your traders, simply take the value of a pip and multiply it by your lot size.
If we use the example above, the pip value of 0.00012195121 would be multiplied by 10,000 if you’re trading a mini lot – and in that case, a price movement of a single pip would be equal to 0.00012195121 x 10,000 = 1.2195121 USD, either in profits or losses
If you were trading a standard lot, then a single pip movement would result in 0.00012195121 x 100,000 = 12.195121 USD in profits or losses
As we’ve mentioned before, the Japanese Yen is the most notable exception when it comes to the way pips are calculated. For the Yen, the process is the same, except that you divide 0.01 by the exchange rate to get the value of a single pip.
Let’s take the CAD/JPY currency pair as an example. The exchange rate is 80.33. So the equation then looks like this: 0.01 / 80.33 = 0.00012448649 CAD.
And if we were trading with a mini lot of 10,000 units, the price movement of a single pip would result in 0.00012448649 x 10,000 = 1.2448649 CAD in profits or losses.
If your account is funded in a particular currency, and that currency is listed second in a currency pair, you’re in luck. This means that pip values are fixed – no math, no complications.
The same rule applies whenever the currency that your account is funded with is the second currency listed in a pair.
We’ll use the US Dollar as an example. The fixed pip amounts are equal to:
Yes – all currencies use pips. However, not all pips are created equal. There are a number of currencies where the value of one unit is much less than what it is with other currencies. In that case, pips are also used – but they’re quoted to the second decimal place, instead of the fourth.
The most well-known example of this is the Japanese Yen. Because the worth of a single Yen is so much smaller than other major currencies, quoting the price to the fourth decimal place would be a headache – and a meaningless move in any case.
But don’t let the situation with the Yen fool you – the Yen is a very popular currency, and has seen a record-breaking number of transactions this year.
But the Japanese Yen isn’t the only currency for which this holds true – most currencies that have small values aren’t quoted to the fifth decimal place – examples include the Russian Ruble, Hungarian Forint, and Czech Koruna. Currency pairs that have one of these currencies at either end will be quoted to the second or third decimal place.
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Now, let’s try to put some of the knowledge that’s laid out in this guide to use. Don’t worry if you don’t get everything right on the first try – repetition is the key to mastering any skill or subject.
While you will be able to make use of pip calculators, and most brokers do have them built into their interfaces and groundbreaking trading apps, having an in-depth understanding of the mathematics will give you a leg up on the competition.
Alright – let’s give it a go then:
1. Currency pair: EUR/USD
Lot Size = Mini lot (10,000)
Exchange rate : 1.22
Question: What’s the a) pip value, and b) pip value for trade?
Answer:
Pip value = 0.0001 / 1.22 = 0.00008196721
Pip value for trade = 0.00819672131 x 10,000 = 0.8196721 EUR
2. Currency pair: AUD/CAD
Lot Size = Standard lot (100,000)
Exchange rate : 0.98
Question: What’s the a) pip value, and b) pip value for trade?
Answer:
Pip value = 0.0001 / 0.98 = 0.00010204081
Pip value for trade = 0.00010204081 x 100,000 = 10.204081 AUD
3. Currency pair: GBP/JPY
Lot Size = Mini lot (10,000)
Exchange rate : 140.68
Question: What’s the a) pip value, and b) pip value for trade?
Answer:
Pip value = 0.01 / 140.68 = 0.0000710833
Pip value for trade = 0.0000710833 x 10,000 = 0.710833 GBP
4. Currency pair: EUR/NZD
Lot Size = Micro lot (1,000)
Exchange rate : 1.72
Question: What’s the a) pip value, and b) pip value for trade?
Answer:
Pip value = 0.0001 / 1.72 = 0.00005813953
Pip value for trade = 0.00005813953 x 1000 = 0.05813953 EUR
5. Currency pair: CHF/USD
Lot Size = Standard lot (100,000)
Exchange rate : 1.22
Question: What’s the a) pip value, and b) pip value for trade?
Answer:
Pip value = 0.0001 / 1.22 = 0.00008196721
Pip value for trade = 0.00008196721 x 100,000 = 8.196721 CHF
So then, how much does the price of major currency pairs change, on average, in pips? One important thing to remember before we move on to concrete data is that the three main sessions for forex trading – the New York, Tokyo, and London sessions all exhibit different behaviors.
You should keep your ear to the ground – keeping up with the news and expectations in the forex market can give you an idea of what could happen, but each session tends to play out a certain way on a regular basis.
It comes as no surprise that each session brings about the biggest differences in the currencies that are tied geographically to that market. On top of that, the overlap between sessions can also bring about large shifts for currency pairs that are tied to both areas – for example, GBP/JPY and EUR/JPY for the overlap between the Tokyo and London sessions.
But that’s a topic for another time. Without further ado, here are the cold hard facts.
Currency Pair | New York | Tokyo | London |
---|---|---|---|
EUR/USD | 92 | 76 | 114 |
USD/JPY | 59 | 51 | 66 |
USD/CAD | 96 | 57 | 96 |
USD/CHF | 83 | 67 | 102 |
GBP/USD | 99 | 92 | 127 |
AUD/USD | 81 | 77 | 83 |
EUR/JPY | 107 | 102 | 129 |
NZD/USD | 70 | 62 | 72 |
GBP/JPY | 132 | 118 | 151 |
AUD/JPY | 103 | 98 | 107 |
EUR/GBP | 47 | 78 | 61 |
EUR/CHF | 84 | 79 | 109 |
So, what can you take away from all of this? Larger price movements in pips are a signal of volatility – which brings about both risk and the possibility of great profits. COVID-19’s impact on the forex market has brought about additional volatility – and provided that you arm yourself with the proper knowledge and skills, that opportunity can be leveraged.
For example, the recent coronavirus relief bill passed by the U.S. congress had a sudden and great effect on the price movements of major currency pairs – it’s safe to bet on the dollar when news like this drops. But above all else, keep in mind that looking at this chart, that you should tailor your approach to each session by trading the currencies that are usually in demand for the session in question.
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So there you have it – while they may require a little bit of math, pips aren’t all that scary. Calculating pips and price movements isn’t too difficult, and with a little practice, it will become like second nature.
We hope that all the talk of decimal places and exchange rates hasn’t scared you off – and if you’ve managed to absorb all the information in this guide – congratulations! Give yourself a pat on the back – you’ve deserved it. You’ve just made an important first step into what will hopefully be a successful venture for you.
If you ever find yourself unsure of something, feel free to check back with this guide. If you can’t remember the difference between pips and pipettes, or how to calculate the pip value in a specific trade, this guide will always be here to serve as a convenient refresher course.
We know that getting into forex trading isn’t easy. But if you keep going at it and apply yourself, the possibilities are vast. Study the terms, familiarize yourself with the world of forex trading – and you’ll go far. And if all this talk of forex trading has made you work up an appetite for more, don’t worry – we’ll have more guides coming your way soon. Just don’t forget about that pesky Yen.
Pip stands for percentage in point or alternatively price interest point. Pips are used to measure the change in value of a currency pair.
The value of a pip is calculated by dividing 0.0001 by the current exchange rate of the currency pair in question. The value that you get is the value of a pip for a single unit of currency.
The value of 1 pip in a particular trade can be found by taking the value of a pip for a single unit of currency (dividing 0.0001 by the exchange rate) and multiplying it by the size of the lot.
Pip calculators allow you to figure out what the value of currency’s pip in a specific currency pair is.
Yes - pip calculators are very useful tools that help you save time and make the process of trading much simpler. You should still have a decent grasp of the underlying principles, but pip calculators have become quite commonplace.
Thinking about how many pips per day is good is not a good approach - instead, you should focus on developing and backtesting a solid strategy that meshes well with your risk tolerance. Arbitrary goals of X pips per day are unrealistic - the market is simply too unpredictable to make that a workable strategy.
To calculate how much money you make (or lose) per pip, take the pip value for a currency pair and multiply it by the lot size.
All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.