If you’ve been interested in the forex or foreign exchange market for a while, it probably won’t sound too foreign.
What is Pip?
If you have witnessed conversations in Forex or foreign exchange communities; You have heard or seen sentences such as “EUR / USD 100 Pips advanced” and “15 Pips returned”. Pip means dot. A pip is a currency jargon that is often used instead of the word dot. The smallest increasing price change standardized for any currency in the Forex and foreign exchange market means the percentage point Pip.
Most frequently traded currency pairs, such as USD / EUR, are represented by four decimal points. For example, if the USD / EUR rises from 1.2055 to 1.2056, we can say that there is a 1 Pip advance.
Why is Pip Important in Forex Market?
Pips are very important in Forex, 1 pip corresponds to a different dollar amount for each currency, and anyone interested in this market needs to know how to calculate the Pip value. It is impossible for forex traders who do not know how to calculate the pip value to know how any currency transaction will affect the value in their account.
How are pip values calculated?
Now, after explaining what the word Pip means, let’s learn how to calculate Pip values with two examples.
First Example USD / JPY
For a currency pair that takes the US dollar as the base currency, we divide only the smallest price change into the current quotation and multiply the amount that follows the division by the amount of the currency being traded. At the end of this process, we calculate the Pip value.
Review the sample process below.
Exchange rate: 89,00
Processing amount: 100,000
0.01 / 89.00 = 0.00011235
0.00011235 × 100,000 = 11.23
In the above example, we divided the amount of Pips from 0.01 to 89.00, which is the USD / JPY exchange rate, and obtained the result of 0.00011235, that is, pips per dollar. Then, we calculated the pips by multiplying the pips per dollar that we found by the amount of dollars traded (100,000).
(Since the currency pairs including the Japanese yen have only two digits after the comma, the 1 pips increase in these pairs is 0.01.)
Second Example EUR / USD
There is another transaction for a currency pair where the US dollar is the opposite currency. Follow the same procedure as in the first example, and then multiply the cost of the pips by the exchange rate and convert the amount back to the US dollar.
For example, let’s say that we trade at 1.3640 exchange rate. Follow the steps step by step.
0.0001 (amount of pips) divided by 1,3640 (EUR / USD exchange rate) = 0.000073313 (value of pips per euro)
0.000073313 (pips per euro) x 100,000 (the amount of dollars traded) = 7.33 (pips in euros)
When we convert the value of pips in euros to USD, it becomes 7.33 x 1.3640 (EUR / USD exchange rate) = $ 9.99 (pips value in US dollars).
Good News: Automatic Pip Calculator
Pip value calculations can be done as the above examples, it may be mixed at first sight. In fact, the only information you should get from this article should be what the word Pip means. Because you don’t always have to deal with such complex operations. Many calculation sites on the Internet offer Pip calculator for free. Most of the time, forex brokerage houses provide this service to their customers.