What is a Forex Pip?
The term ‘Pip’ in forex is short for point in percentage.
‘Point in percentage’, which for the remainder of this article I will only refer to as ‘pip’, is a unit of measurement we use in forex trading.
To elaborate, pip is a standardized measure of change (a very small measure of change) in a forex currency pair.
When it comes to changes in currency quotes, a pip is the smallest amount by which it can change.
The majority of currency pairs in forex appear as four decimal points (for example, USD/EUR 1.0392).
The pip change in this example, 1.0392, is the smallest amount by which the currency price can change, so 0.0001.
If USD/EUR 1.0392 rises to 1.0393, the price was just raised by one pip.
If USD/EUR 1.0392 falls to 1.0390, the price just fell by two pips.
If USD/EUR 1.0392 rises to 1.0492, the price was just raised by 100 pips.
If USD/EUR 1.0391 rises to 1.1391, the price was just raised by 1000 pips.
Not all currency pairs are displayed with 4 decimal points.
Among the major currency pairs, for example, USD/JPY (Japanese Yen) is shown as two decimal points.
In this case, let’s say USD/JPY is at 111.50.
If USD/JPY falls to 111.40- this is a decrease of 10 pips.
If USD/JPY falls from 111.50 to 111.49, that is still one pip.
Remember, a pip is the smallest unit of measurement we use to evaluate currency pairs in forex trading.
Therefore, if a currency pair is only shown with two decimal points, we still use pip to describe the 2nd decimal point change the same way we do the 4th decimal point in a currency pair shown with four decimal points.
A pip is just a term that makes it easier to describe a change in currency.
The reason that measurements such as pip’s are important in forex is because small changes in price can still have effect on your currency trades. This is especially true if you are trading with a large account.
If you are still confused but have some time to watch a short video, ‘Trading 212’ on Youtube has a great explanation on what pips are exactly.
What are Forex Pips Used For?
Forex pips are really only used for as a way to measure changes or values of currency trades.
Pips are not active factors in forex that you need to worry about, they are simply a means to better describe certain price points of currency pairs.
Because a pip is most commonly used when it comes to a currency pair price with four decimal points, it’s a lot easier to say the ‘price rose by 20 pips’ rather than saying the price ‘rose by 4/thousandths… you get the idea.
Forex Pip Calculator
If you need to calculate a pip value for whatever reason, there are many tools online that allow you to do just that.
Investing.com has a great calculator that is free to use- all you need to do is choose your account’s currency and enter in the trade size, by units.
The table then lists all of the currency pairs and tells you the price, the value in lots (standard, micro. and mini lot) and gives you the exact pip value.
Follow this link to use the forex pip calculator, courtesy of Investing.com.
Learn to Trade Forex
Knowing what forex pips are is a good sign that you are starting to learn common terminology in the forex game and are well on your way to being a great forex trader.
If you are a novice and want to actually learn how to make profitable trades in forex, simple terminology will not get you very far. It’s important to learn how the forex markets and trends work and how traders are able to generate profit from these changes in currency price.
For the beginner forex trader, I suggest you make the initial investment for a forex trading course. Go here if you are interested in a comprehensive course that will teach you everything you need to know and more about how to make a nice living just by trading the foreign exchange market.
Also, if you haven’t already, feel free to grab your copy of our Free Forex Trading Fortunes PDF – get your copy sent straight to your email below.[convertkit form=1499651]