You hear us discussing it all the time: pip gains, pip losses, total pip movement, etc. But, if you’re new to the Forex market, this term might be completely foreign to you. We wouldn’t send you to Spain empty-handed without knowing a lick of Spanish and the same can be said in the Forex market, so consider us your personal Forex translators!
What is a PIP
A “PIP” stands for Percentage in Point. Simply stated, a pip is a minuscule measure of change within a currency pair’s price that we use to calculate profits and losses. You could measure pips in terms of the direct quote or in terms of the underlying currency. A single pip is roughly worth $0.0001 for U.S. dollar related currencies; also referred to as 1/100th of 1% or one basis point.
Investors utilize this standardized measure to protect themselves from huge losses and extreme volatility. For instance, if a pip’s value was increased to 10 basis points, a one-pip change would cause more extreme volatility in currency values than one basis point.
Pips in Action
Now that you know what a pip is and why we use it, let’s do a little Forex role play. Remember, we are looking at pips for the U.S. dollar value. Let’s say you have a EUR/USD direct quote of 1.3000. This means that for every euro, you need 1.30 U.S. dollars. Similarly speaking, if there is a one pip value increase to 1.4000 then you could buy slightly more euros with your U.S. dollar. Pretty simple right? So, if a trader buys 10,000 euros with U.S. dollars, the price they pay would be $7,692.31. You can figure this out with the following formula: (1/1.3000) x 10,000.