Do you know what the difference between “pips” and “pipettes” is? Even if you are a beginner in forex trading, you have probably heard of these terms more than once, which is normal because “a pip” is a widespread term in forex trading.
That why all forex traders should know what are pips and what do they represent. And because knowing what pips are, is a required knowledge for all traders, this article is all about them.
Also, I will explain to you what pip values are and how you and other traders should calculate profit and loss correctly.
So, let’s find out what pips are.
What is a Pip, and What Does it Represent?
Pip, short for point in percentage, is the price move in a given exchange rate. In other words, a pip expresses the change in the value between two currencies, and it is usually the last decimal place of a price quote.
Pip is also the smallest amount by which a currency quote can change, and it can be measured in terms of the quote or terms of the underlying currency.
For example, if EUR/USD moves from 1.2600 to 1.2601, then the .0001 USD rise in value is one pip.
Usually, almost all pairs go out to four decimal places. However, the Japanese yen pairs go out to two decimal places.
For instance, as we just saw for EUR/USD, it is 0.0001. That’s because a pip is usually $0.0001 for U.S.-Dollar related currency pairs. To be more specific, pip is more commonly referred to as 1/100th of 1%.
However, with Japanese yen pairs that is not the case. For the USD/JPY, it is 0.01.
Pips help protect investors from potential losses. A one-pip change could cause higher volatility in currency values if a pip were ten basis points.
Now that you know what pips are, it’s time to see what the definition of pipettes is. If understanding how pips work was confusing, wait until you see how pipettes work and why some brokers quote currency pairs by using a “pipette.”
What are Pipettes?
Some forex brokers quote currency pairs beyond the standard decimal paces. Instead of quoting only “4 and 2” decimal places, they also quote “5 and 3” decimal places. These brokers are quoting fractional pips, which are also known as “pipettes.”
As I mentioned previously, understanding how pipettes work might be confusing. In general, a “pipette” or as some brokers call it “fractional pip” is equal to a tenth of a pip.
For instance, if EUR/USD moves from 1.260631 to 1.260632, then .000001 rise in value is 1 pipette or 1 fractional pip.
When you are trading, you will notice that the digit that represents a tenth of a pip is usually positioned on the right of the two larger numbers. To make it easier for you, let’s take a look at this picture.
How to Calculate the Value of a Pip
As we mentioned above, each currency has its own relative value. Therefore, traders need to calculate the value of a pip for that particular currency pair. Also, the monetary value of each pip depends on:
- The currency pair being traded
- The size of the trade
- The exchange rate
For example, A $200,000 trade is closed at 1.0582 after gaining 20 pips. The trade involved the USD/CAD pair.
Step 1: Traders need to determine the number of quote currency; in our case, CAD, each pip represents. To do so, we will multiply the amount of trade by 1 pip.
200,000 x 0.0001 = 20 CAD per pip
Step 2: Traders have to calculate the number of the base currency; in our example, that is the USD, per pip. To do so, we will divide the number of CAD per pip by the closing exchange rate to arrive at the number of USD per pip.
20 ÷ 1.0582 = 18.90 USD per pip
Step 3: Traders need to determine the total profit or loss of the trade. To do so, we will multiply the number of pips gained, by the value of each pip in USD to arrive at the total loss or profit for the trade.
20 pips gained x 18.90 USD per pip = $378 USD profit
Voila! You now know how to calculate pip value properly. However, if you are having difficulties calculating the pip value, don’t worry. You can always use a Pip Value Calculator.
Now that you know what pips and pipettes are, you are officially one step closer to becoming a successful forex trader. When it comes to trading forex, the smartest choice every trader can make is to study the market and stay up-to-date informed.
If you want to read more about pips, and the terminology that is used on the forex market, then the article “How to start forex trading for Beginners” is precisely what you are looking for.