Financial Market (Part 5)

Understanding Pips in Forex

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The term 'pip', which stands for "point in percentage", refers to the smallest price change a currency pair can make. For most currencies, this is the fourth digit after the decimal, but for Japanese yen pairs, it’s the second digit.

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Below is an example of how exchange rates are displayed for different currency pairs, with the pip digit shown:
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EUR/USD = 1.13422
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GBP/CAD = 1.71791
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USD/JPY = 110.771

What is a pip

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In FX trading, a “point” refers to a fraction of a pip, and today, most brokers display quotes with one extra decimal place beyond the pip.
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10points = 1pip
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In other words, the final digit in a price quote is a point, which helps make the quotes more detailed. This also allows brokers to show spreads and trades in smaller, more accurate amounts.

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For example, a 1.4 pip spread equals 14 points.
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In Forex, we use pips and points, but for assets like indices, you’ll often hear “base point” or “index point” instead. These terms represent one full currency unit.
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So, if the FTSE 100 index is at 7664.95, the digit before the decimal point is the “index point” and equals £1.

Pip value
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The monetary worth of each pip (and point) depends on the currency pair you are trading and the size of your trade.
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Why does this matter? Because your profit or loss depends on multiplying the number of pips the price moves either for or against you by the value of each pip.
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To calculate the pip value in Forex, you can use these formulas:
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• Pip size (in decimal form) × Trade size (in units) = Pip value in the Term currency
  
  
• Pip size (in decimal form) × Trade size (in units) ÷ Exchange rate = Pip value in the Base currency

Let’s explore some examples to better understand this.

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Pip in decimal places

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‘Pip in decimal places’ indicates which decimal digit counts as a pip—typically the fourth digit after the decimal point, or 0.0001 for most pairs. In this scenario, 1 lot corresponds to 10 units of the Term currency since 0.0001 X 100,000 = 10.
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For JPY currency pairs, where the pip is counted at the second decimal place (0.01), 1 lot is worth 1,000 JPY, because 0.01 X 100,000 = 1000.
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To better understand how pip value is calculated, refer to the table below which shows different trade sizes and pairs.

Let’s review the key points from this lesson:
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• The terms pips, points, and ticks describe price fluctuations in various markets.
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• In Forex, a pip usually corresponds to the fourth decimal digit, with JPY pairs using the second decimal digit instead.
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• A point is a smaller fraction of a pip and is the last digit shown in a price quote.
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• Calculating spread and PnL involves multiplying the pip value by the number of pips.
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• For four-decimal currency pairs, 1 lot’s pip value equals 10 of the term currency.
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• Other asset groups use Points and Ticks differently.

The term ‘Tick’ in FX describes a single price change, no matter how many points the price shifts. Price movements don’t always happen one point at a time. For instance, if EUR/USD moves from 1.10564 to 1.10567, that counts as one tick, even though the price changed by 3 points.
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In asset classes such as Futures and Commodities, a ‘tick’ denotes the smallest price movement and plays a role in calculating total PnL. 

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You can find more information in the specific asset details on the Atmexx website.

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