2022-11-21 02:06
What is Pip?
With the help of Pip it is possible to express the number of changes in currency pairs and financial market symbols. The amount of profit and loss is also determined by Pip.
What is the concept of Pip?
The word Pip is an abbreviation of "price interest point" or "point in percentage".Pip is the smallest unit of exchange value in the world financial markets, such as forex, through which it is possible to indicate the number of changes in assets and the amount of profit and loss of a trade. Therefore, the concept of pip is very important in the financial markets, because the value of this criterion is very important for the amount of risk in the trades. Without knowing the concept of pip, traders cannot determine the amount of profit and loss for their trades.
Pip position in currency pairs
Before examining the pip position in currency pairs, traders should learn about another concept called "Pipette". Each Pip is equal to 10 Pipettes. Therefore, brokers are divided into two categories: five-digit brokers and four-digit brokers.
- 4 Digit Broker
Four-digit brokers are old brokers that display the change in the exchange rate value for transactions up to 4 decimal places, i.e. a pip. (In this case, the Japanese yen is an exception).
Example: for the EURUSD currency pair, the exchange rate is 1.5362. At this displayed rate, the last number on the right side is a pip. For the USDJPY pair, when the rate is 100.12, the second digit on the right side is the pip indicator.
- 5 Digit Broker
Five-digit brokers are brokers that display price changes with up to five decimal places. In this case, the fifth decimal place is a pipette or a point, and the fourth place is a pip.
Example: for the EURUSD currency pair, the rate is 1.25698, and the decimal number 8 represents a pipette, and the number 9 represents a pip. If the rate of the USDJPY pair is 100.123, the third decimal place, i.e. the number 3, represents a pipette, and the second decimal place, the number 2, represents a pip. Thus, one pip is equal to 10 pipettes or 10 points.
The position of the pip is one ten-thousandth of the price, so usually the fourth decimal place of currency pairs is called a pip. This applies to both five-digit and four-digit brokers.For example, if the EURUSD currency pair is at a price of 0.98239, the fourth decimal place, which is the number 3, is a pip.
However, for currency pairs where one side is yen (JPY), there are two digits (four-digit brokers) or three digits (five-digit brokers) after the decimal point. For these currency pairs, the pip position is the second number after the decimal point. For example, if the USDJPY currency pair is traded at 149.765, the number 6, the second digit after the decimal point, is the pip.
Calculation of Currency pairs changes
Suppose the currency pair USDCAD is at a price of 1.38021. As mentioned earlier, the number 2 is a pip and the number 1 is pipette, and after a few hours the price will rise to 1.38521. Therefore, this currency pair has increased by 50 pips or 500 pipettes.
In another example, the USDJPY currency pair is at a price of 149.857. After some time, the price of the currency pair will fall to 148.436, which means that the price of the currency pair has decreased by 142.1 pips or 1421 pipettes.
Calculation of profit and loss
In the forex market, profits are usually described on the basis of pip, since the pip amount is stable, but its dollar amount can change. Thus, the dollar amount of the profit depends on the trading volume, the type of currency pair and the price of the currency pair.
Trading volume
The size and volume of the currency pair that traders trade will affect the percentage and amount of their profit.Therefore, traders must be able to estimate the trading volume or Lot correctly. Also, traders should be aware that the value of each pip is different for each trading volume they choose.
- Standard Lot: At this trading volume you trade a whole Lot or, in other words, 100,000 currency pair units.
- Mini Lot: At this trading volume you buy 1/10 of a Lot, which is equal to 10,000 currency pair units.
- Micro Lot: At this trading volume you buy 1/100 of a Lot, which is equal to 1000 currency pair units.
The profit and loss amounts on the Forex market are calculated based on the pip value.When calculating profit and loss for all currency pairs on the Forex market, the size of the trading volume (lot) is divided by 10000, except for currency pairs with JPY on one side. For currency pairs containing JPY, the size of the trading volume (lot) is divided by 100.
For example, if traders make a trade in currency pairs without the Japanese yen and the trading volume is 100,000 units or a lot, to calculate the value of each pip 100,000 is divided by 10,000 and the result is 10.In this case, for every pip gained, the value of the trader's assets increases by $10, or conversely, for every pip lost, the trader loses $10.
When traders trade a mini lot (0.1 lot), they divide 10,000 units by 10,000 to calculate the profit and loss value, and the result is 1. This means that one pip is equal to one dollar, and for a profit or loss of one pip, the trader's wealth decreases or increases by one dollar. When traders open a trade with a micro lot volume (0.01 lot), which is equal to 1000 units of a currency pair, to calculate the value of each pip 1000 units are divided by 10,000. The result is 1/10th (0.1) This means that for every ten pips of profit or loss, the trader's assets increase or decrease by $1. If the trading volume is a mini lot (0.1), each pip profit is equal to one dollar, and if the trading volume is a micro lot (0.01), each pip profit is equal to $ 0.1 or 10 cents.
Currency Pair Type and Price
When calculating the value of each pip, in addition to the trading volume, the type and price of the currency pair are also important, and their calculation is complicated.However, in general, for currency pairs where the US dollar is the second pair (e.g. EURUSD and GBPUSD, etc.), as well as for symbols whose price is in dollars (e.g. cryptocurrencies, gold, etc.), stocks and stock indices, the value of each pip is $10 for a standard lot (1 lot), $1 for a mini lot (0.1 lot), and 10 cents for a micro lot (0.01 lot) .The Forex calculator can be used to calculate the pip value for other symbols.