In foreign exchange markets, a percentage in point (pip) is a unit of change in an exchange rate of a currency pair. A pip is the smallest whole unit price move that an exchange rate can make, based on forex market convention.[1]
It's important because forex trading involves tiny fluctuations in exchange rates, and Pips provide a standardized way to express these changes. By using Pip, traders can easily understand and discuss price movements, calculate profits and losses, and manage risks more effectively.
The major currencies (except the Japanese yen) are traditionally priced to four decimal places, and a pip is one unit of the fourth decimal place: for dollar currencies this is to 1/100 of a cent. For the yen, a pip is one unit of the second decimal place, because the yen is much closer in value to one hundredth of other major currencies.[2]
In the forward foreign exchange market, the time value adjustment made to the spot rate is quoted in pips, or FX points or forward points.[3]
A pip is sometimes confused with the smallest unit of change in a quote, i.e. the tick size. Currency pairs are often quoted to four decimal places, but the tick size in a given market may be, for example, 5 pips or 1/2 pip.
The value of a pip depends on the currency pair, the exchange rate, and the size of your trade position (usually measured in lots).[4]
If the U.S. dollar is the quote currency(the second of the pair),such as with the EUR/USD pair, the pip is fixed at .0001.
In this case, the value of one pip is calculated by multiplying the lot size by 0.0001. So, for the EUR/USD pair, multiply a lot size of, say, 10,000 euros by .0001. The pip value is $1. If you bought 10,000 euros against the dollar at 1.1055 and sold at 1.1065, you'd make a profit of 10 pips or $10.
If the U.S. dollar is the base currency(the first of the pair),such as with the USD/EUR pair,the pip value involves the exchange rate.
Pip Value=(size of a Pip)/(Exchange Rate)*(Lot Size)[5]
For example, .0001 divided by a USD/CAD exchange rate of 1.3600 and then multiplied by a standard lot size of 100,000 results in a pip value of $7.35. If you bought 100,000 USD against the Canadian dollar at 1.3600 and sold at 1.3601, you'd make a profit of 1 pip or $7.35.
If the currency pair of the Euro and the U.S. Dollar (EUR/USD) is trading at an exchange rate of 1.3000 (1 EUR = 1.3 USD) and the rate changes to 1.3010, the price ratio increases by 10 pips.
In this example, if a trader buys 5 standard lots (i.e. 5 × 100,000 = 500,000) of EUR/USD, paying and closes the position after the 10 pips' appreciation, the trader will receive with a profit of (i.e. 500,000 (5 standard lots) × 0.0010 =). Most retail trading by speculators is conducted in margin accounts, requiring only a small percentage (typically 1%) of the purchase price as equity for the transaction.The Japanese Yen is an exception to this rule because of its worth against the US dollar being 0.01 [6]
If the NZD/USD spot is trading at 0.8325 and the NZD/USD 1-year forward contract is traded at -270 pips, the outright 1-year forward is priced at 0.8055 (0.8325 - 0.0270).
Electronic trading platforms have brought greater price transparency and price competition to the foreign exchange markets.[7] Several trading platforms have extended the quote precision for most of the major currency pairs by an additional decimal point; the rates are displayed in 1/10 pip.
The table portrays pip values for selected currencies as used by Fenics MD[8] for their forward contracts or non-deliverable forwards.
| Currency | Pip value | |
|---|---|---|
| EURUSD | ||
| GBPUSD | ||
| USDJPY | ||
| USDCAD | ||
| AUDUSD | ||
| USDCHF | ||
| NZDUSD | ||
| USDDKK | ||
| USDSEK | ||
| USDNOK | ||
| USDHKD | ||
| USDBRL |