Pip in Forex – Explanation
Before you start trading Forex you must understand what a pip in Forex is, as this is the reference for calculating your profits or losses. Pip in Forex stand for percentage in point. This is usually the smallest increment and expressed as the fourth decimal point in most of the quoted currency pairs. An exception will be the Japanese yen (symbol – JPY) where it’s pip value is represented by the second digit after the decimal point.
Example1: We know that the price of the EUR/USD currency pair was quoted at 1.3110. We also know that it then rose up to 1.3114. How many pips did it move? The fourth digit after the decimal point in the first price – 1.3110 is: 0. The fourth digit after the decimal point in the second price – 1.3114 is: 4. The difference between 0 and 4 is 4. Therefore, we know that price just moved 4 pips upward.
Example2: The GBP/CHF currency pair was quoted at the price of 1.2552 and then it moved down to 1.2542. The calculation here is similar but with one small difference. We can see that the difference between those two prices (called Spread) is now on the third digit: 1.2552 to 1.2542. Logically, we know that if the fourth digit represent 1 pip, then the third one indicated 10 pips. So, what was the movement of the currency pair? The third digit of the first price is 5, while the third digit of the second price is 4. The difference between 5 and 4 is 1, so now we know that the pair decreased by 10 pips.
Example3: The USD/JPY currency pair was quoted at 80.50 and then it rose, up to 80.59. As we learned above, the pip value on the Japanese currency (JPY) is expressed by the second digit after the decimal point. The second digit after the decimal point on the first price – 80.50 is: 0. The second digit after the decimal point on the second price – 80.59 is: 9. The difference between 0 and 9 is 9. So we know that the pair rose by 9 pips.