Forex - What are PIPs? - Investment - Currency Trading

Profit and loss in Foreign Exchange Trading (Forex) is measured in a unit of currency measure called a PIP. So it is important that you know what PIPs are and how to use them as a Forex trader. So take a look and learn.

I gave a brief description of PIPS in How Forex Works. Now, I'll go into more detail about what they are and how they are used in Foreign Exchange Trading (Forex).

Pip Basics

How to Calculate Pip Values (If you really want to.)

The math in this part gets just a little tiresome but there is good news: You really don't need to do these calculations yourself because most FOREX brokers do it for you, automatically. Still, I provide the formula here in case you just want to know how to do it.

So just how much in dollars is the movement of one or more pips worth-for example, per 10,000 Euros in EURUSD? How much is one pip worth per 10,000 Dollars in USDJPY? To demonstrate, we will refer to 10,000 units of the base currency, as the "Notional Amount."

The formula for calculating a pip value is:

One pip, (with proper decimal placement)/currency exchange rate) x Notional Amount

Example with USDJPY: (.01/130.46) x USD10,000 = $0.77 or 77 cents per pip

Example with EURUSD: (.0001/.8942) x EUR10,000 = EUR 1.1183

Now, in the EUR/USD example, we want the pip value in USD, so we must multiply EUR1.1183 x (EURUSD exchange rate): EUR 1.1183 x.8942 = $1.00

This is a phenomenon you will see with any currency where the currency is quoted first (such as EUR/USD, GBP/USP, or AUD/USD): the pip value is always $1.00 per 10,000 currency units. This is why pip (or "tick") values in currency futures, where the currency is quoted first, are always fixed.

Approximate pip values for the major currencies are as follows:

(per 10,000 units of the base currency)

USD/JPY: 1 pip = $.77. A change from 130.45 to 130.46 (1 pip) is worth about $.77 per $10,000.

EUR/USD: 1 pip = $1.00 (.8941 to.8942 is worth $1.00 per 10,000 Euros.)

GBP/USD: 1 pip = $1.00 (1.4765 to 1.4766 is worth $1.00 per 10,000 Pounds.)

USD/CHF: 1 pip = $.59 (1.6855 to 1.6866 is worth $.59 per $10,000.)

At this point, you may be thinking that 1 pip multiplied by 10,000 units of a currency doesn't add up to much money and that you will need a lot of capital to become a viable trader! Not to worry: Take a look at Forex Math to learn how leverage and margin accounts make trading in Forex work for just about everyone.

Remember: You really don't need to do these calculations yourself because most FOREX brokers do it for you, automatically.

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