Pip In Forex Meaning Explained Trading Calculation

PIP In Forex Meaning

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PIP is similar to basis points: it is a standard measurement unit to showcase the movement of 1%. One PIP is one basis point. Characteristically, foreign currency markets involve high-volume transactions, and every decimal point counts. Thus, PIPs offer the precision required for accurately expressing profits and losses.

Key Takeaways

PIP in Forex means price interest point or percentage in point. It denotes the minor unit change in the price of a currency pair.It is a unit of measurement, just like height, weight, length, or temperature. In forex, currency price variation is denoted by PIP. Thus, traders can easily comprehend profits and losses from PIP values.It indicates the fourth decimal value. One PIP is one basis point; numerically, it is defined as one by 100 of 1%.In Forex, the PIP value determines risk. Based on PIP values, traders can regulate or exit the trade in time—to avoid heavy losses.

PIP In Forex Trading Explained

PIP is the slightest price movement in currency exchange rates. PIP stands for percentage in point. It is the fourth decimal digit in currency price and, therefore, a precise metric. Characteristically, foreign exchange markets witness a high volume of transactions on top of high liquidity.

It is a unit of measurement, just like height, weight, length, or temperature. In forex, currency price variation is denoted by PIP. Thus, traders can easily comprehend profits and losses from PIP values.

In currency markets, there is a difference between the price a trader pays and the price they receive—known as the bid-ask spread—it is a common forex trading technique. PIPs represent this difference in the bid-ask spread. Similarly, when a trader makes a profit, it is expressed in PIPs.

Forex, by design, is a high-risk investment—traders should be acquainted with the technicalities. These risks can be measured using PIPs. For example, hyperinflation is a risk. Hyperinflation impacts currency value and exchange rates. That is, if a currency loses value, imports become more expensive. In such a scenario, customers will not be able to afford imported goods and will be forced to purchase local alternatives.

The monetary value of PIP is primarily determined by leverage. Leverage refers to the invested cash that is borrowed as investment capital. It directly affects PIP in proportion to the percentage of capital that is borrowed. Leverage increases volatility. When the leverage is high, a trader can lose everything with a loss of two PIPs.

Thus, forex traders register profits when there is a movement in currency value. For example, if a trader buys EUR/USD at 1.1029, he will make profits only when the EUR rises, i.e., when the quoted currency is traded at a value higher than 1.102.

Calculation Example

Now let us look at PIP in forex calculation with examples.

For determining the PIP value, we divide one PIP (primarily 0.0001) by the currency pair’s current market value and then multiply it by the lot size.

Let us assume that Ramon is a forex trader; he studies and invests in different currency pairs. Ramon is an analyst; he understands the accuracy of price variations in forex markets.

Ramon initiates a trade between two currencies—EUR/USD. The EUR is the base currency, while the USD is the counter currency.

Here, the fourth decimal digit shows a fluctuation of 9 PIPs.

Alternatively, if the USD asking price had moved to 1.0053, the fluctuation would have been 18 PIPs.

In both scenarios, Ramon makes a profit—PIPs or 18 PIPs. Thus, a PIP expresses currency price fluctuation in the form of a uniform unit that every forex trader can comprehend.

The standard lot size is 100,000, but mini, micro, and nano lot sizes are available in 10000, 1000, and 100 units. If Ramon bought a mini lot of 10000 units, and if there is a currency price fluctuation of 9 PIPs, then Roman makes the following profit:

Profit = 0.0009/1.0044 x 100Profit = 8.96.

Thus, Ramon made a profit of $8.96 due to a fluctuation in the EUR/USD currency pair. To receive payment, Ramon needs to exit the position.

Importance

Let us look at the importance of PIP in forex.

In Forex, the PIP value determines risk; a trader needs to know PIP rates and the likely direction of currency price fluctuation to attain a good position.The most crucial aspect of PIP is allowing analysts to study the price movement to the fourth decimal digit—traders get precise feedback.Based on PIP values, traders can calculate associated risks—they make prompt decisions accordingly. They regulate or exit the trade in time—to avoid heavy losses.In forex trading, PIP values are beneficial because they characteristically involve a high volume.Fractional PIPs are more precise than PIPs.PIPs act as a universal currency price fluctuation unit; they facilitate global communication.