What is a Pip? In the image below, a pip is the fourth decimal. Pips are one of the ways by which traders calculate how much profit they made or lost on a trade. If you enter a short position at 1. Remember, short means you want the rate to go down. So, if you short at 1. Below are a few more examples of trades.
You may have noticed that in all the examples above, the pip is either in the fourth or second decimal place. The fourth and second decimal place are the standard in Forex. Virtually every pair you trade will have the pip as either the fourth or second decimal. The value of a pip changes depending on the pair you trade. Calculating the value of a pip is not vital to your success, as a trader, since your broker will automatically calculate the value for you.
So, if you enter long at 1. Clearly, this is not much money. You will learn about leverage later. In the next two examples, because the base currency is not USD, using the same equation as above we get the value of a pip in the base currency. On any pair, with USD as the quote currency, to get the pip value in USD you simply multiply the pip value by the exchange rate:. The next and thankfully the last example shows how to calculate the value of a pip, in USD, for pairs that do not have USD as either the base or quote pair.
How boring was that? As is said above it is not vital to know this stuff. In the last few years, some Forex brokers have started displaying an additional decimal at the end of a currency pairs rate. This additional decimal is know as a pipette, or a micro pip. A pipette is simply one tenth of a pip. The pipette will appear as either the fifth or third decimal place in a currency pairs rate.
If your broker displays pipettes, do not worry. You can simply ignore the pipette when you are calculating how many pips you have made or lost on a trade. Next I will teach about lots, leverage, and margin. Calculating the current value of a pip is easy. Here is the simple formula:More...