What is a PIP?
What is a pip?
A pip in forex is an acronym for ‘point in percentage’ and is a basic unit of measurement for currency pairs. In fact, a pip is the smallest amount of change a currency pair is quoted in. In most cases, a pip represents 1/100th of 1 per cent. That means for every 1 pip, a currency pair moves 0.0001. That’s because currency pairs are usually represented by four number after a decimal point. This excludes the Japanese Yen, which only has two numbers after a decimal point.
Examples of EUR/USD and AUD/USD:
For example, the Euro and United States dollar pair (EUR/USD) could be quoted as 1.1400. That means for every Euro, the buyer would receive $1.14 USD.
For another example, the Australian dollar and United States dollar (AUD/USD) could be quoted as 0.7093. That means for every Australian dollar, the buyer would receive 70.93 US cents.
Example of Japanese Yen pairs
Japanese Yen pairs, however, are quoted with two numbers after the decimal point. That means the pip is the second number after the decimal point. For example, the United States dollar and Japanese Yen pair (USD/JPY) could be quoted as 111.56. That means for every United States dollar, the buyer would receive 111.56 Japanese Yen. For travellers and holidaymakers, you may notice these numbers changing on boards at foreign exchange companies based at the airport. To understand the value of a pip, let’s say the Euro and USD pair (EUR/USD) is quoted at 1.1388. If the Euro increases in value by 5 pips, the currency pair would then be quoted as 1.1393. But if the USD strengthens and the Euro falls by 5 pips, the currency pair would then be quoted as 1.1383.
A pip can result in hundreds or thousands of dollars
On a small amount of money, a pip may not seem like a big deal. But on large investments, the movement of a pip can result in hundreds or thousands of dollars.
For example, say if an investor has Australian dollars and wants to purchase 10,000 in United States dollars at a quote of 0.7090. The calculation for this would be:
(1/currency quote) x purchase amount
1/0.7090 x $10,000
1.4104 x $10,000 = $14,104
The investor would have to pay $14,140 AUD to receive $10,000 USD.
But if the AUD/USD currency pair was 5 pips lower at 0.7085, the number would be different.
( (1/currency quote) x purchase amount
1/0.7085 x $10,000
1.4114 x $10,000 = $14,114
At this quote, the investor would have to pay $14,114 AUD to receive $10,000 USD. In this case the movement of 5 pips, the smallest unit of measurement, changes the value by $10.
What are fractional pips?
Fractional pips, also known as pipettes, are not quoted or used as frequently as a pip. That’s because the value of one pipette is equivalent to a tenth of a pip. To put it more simply, 10 pipettes make up 1 pip. It’s important to understand the value of a pipette because sometimes forex brokers will quote the value of a currency pair with 5 numbers after the decimal point. If this is the case, the fourth number after the decimal point is the pip and the fifth number is the pipette. In terms of Japanese Yen pairs, a pipette would be the third number after the decimal point.
The number ‘1’ is the pip. The smaller number ‘3’ is the pipette.
How to calculate a pip
In an earlier example, we explored how an investor wanting to buy $10,000 USD with Australian dollars would have to pay $14,104 AUD. Here we are going to show you how to calculate the value of a pip, in terms of base currency, for any given forex pair.
Let’s use the Great British Pound/United States Dollar (GBP/USD) pair as an example. Say the quote for this currency pair is 1.3200. This means for every 1 British Pound, you receive US$1.32.
To calculate the pip value in terms of GBP, the following formula would be used:
Value change in term (counter) currency x exchange rate ratio = pip value in base currency.
If the value change is 1 pip and the exchange rate ratio is 0.7575 (1 GBP / 1.3200 USD), the formula would look like this:
0.0001 (1 pip) x 0.7575 (exchange rate ratio) = 0.00007575 (pip value in GBP).
If an investor buys 10,000 units of the GBP/USD pair and the quote changes by 1 pip, the monetary value of this change would be 0.75 GBP (10,000 units x 0.00007575 pip value).