A pip is the smallest movement in the price of a currency pair in the forex market. It measures the change in value between two currencies. In its purest form, it is the smallest amount by which a currency quote can change. For instance, if the EUR/USD pair was to move 1.1213 to 1.1214, the rise in value is considered one pip.
While most currency pairs go out for four decimal places when it comes to pips and price changes, some go for two decimal places. For U.S dollar currency pairs, the change in pip happens in the fourth decimal places referred to as one basis point or 1/100th of 1%.
The pip change for GBPUSD EUR/USD and AUD/USD is usually 0.0001, while that of USD/JPY is usually 0.01. For instance, if GBP/USD moves from 1.2970 to 1.2965, then it means it has dropped by five pips of 0.0005. Likewise, if USDJPY was to move from 108.77 to 108.76 then it means it has dropped by one pip or 0.01.
Pips vs. Pipette
However, there are forex traders that quote currency pairs beyond the standard four and two decimal places. Conversely, any movement beyond the four or two decimal places is considered as a pipette. Consider EUR/USD quoted as 1.10568 and moves to 1.10569; then, the currency pair has, in this case, moved up by one pipette. Likewise, if USD/JPY was to move from 108.784 to 108.787, then it has moved higher by three pipettes or 0.003.
Calculating the Value of a Pip
Each currency pair in the forex market comes with a relative value. Likewise, the value of each pip differs from one currency pair to another. Consider USD/CAD quoted as 1.0200. What this means is that one U.S dollar amounts to 1.0200 Canadian dollars.
Similarly, if we traded 5,000 units of USD/CAD, then one pip change would be worth:
The value of one pip would be 5,000 units X 0.0001= $0.5
What this means is that for every pip change, one would earn or lose $0.5. If USD/CAD were to move from 1.0200 to 1.0202, then one would have earned $1.
Pip value varies from one currency pair to another, as they are dependent on how the currencies are traded. Likewise, pip value also depends on the platform that one is using to trade the forex market. Some platforms though rare, record price movements in half pip increments.
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