# What is a Pip in Forex?

#### ByFxpips Gainer Team

Jul 11, 2024

A pip (standing for “percentage in point”) is the smallest possible change in the value of a currency pair in the forex market.

In simple terms, a pip is the fourth decimal place of a currency quote, representing the smallest possible price change. For example, if the EUR/USD exchange rate moves from 1.2050 to 1.2051, that 0.0001 change represents one pip.

The value of a pip depends on the currency pair and the trade size (lot size). Calculating the pip value is an important concept for forex traders to understand, as it allows them to determine their potential profits and losses.

## What is a Pipette?

In the forex market, some brokers may quote currency pairs with an additional decimal place beyond the standard “4 and 2” decimal places. These extra decimal places are known as “fractional pips,” “points,” or “pipettes.”

A pipette represents one-tenth of a standard pip. For example, if the EUR/USD exchange rate moves from 1.2050 to 1.20501, that 0.00001 change represents one pipette.

### Example:

Let’s say the GBP/USD exchange rate is quoted as 1.30542. The digit to the right of the two larger digits (the “2”) represents the pipette, or one-tenth of a pip.

If the GBP/USD rate then moves to 1.30543, that 0.00001 change in the rate represents one pipette, or one-tenth of a pip.

Fractional pips or pipettes are used by some forex brokers to provide more granular pricing and potentially tighter spreads for traders. However, the standard pip is still the most commonly used unit of measurement in the forex market.

### Calculating the Value of a Pip

To determine the value of a pip for a particular currency pair, you need to take into account the relative value of each currency. The formula to calculate the pip value is:

(The value change in the counter currency) x (the exchange rate ratio) = pip value (in terms of the base currency)

Let’s go through some examples:

In this case, the exchange rate is expressed as 1 USD to 1.0200 CAD (or 1 USD/1.0200 CAD).

The pip value calculation would be:

So, if you traded 10,000 units of USD/CAD, a one-pip change in the exchange rate would result in a \$0.98 change in the position value (10,000 units x 0.00009804 USD/unit).

Example 2: GBP/JPY = 123.00
In this example, the currency pair uses two decimal places to measure a one-pip change in value (as opposed to the typical four decimal places).

#### The pip value calculation would be:

[.01 JPY] x [1 GBP/123.00 JPY] = 0.0000813 GBP per unit traded

Therefore, when trading 10,000 units of GBP/JPY, each one-pip change in the exchange rate would be worth approximately 0.813 GBP.

The key points to remember are:
– The pip value calculation takes into account the relative value of the two currencies in the pair.
– The pip value is expressed in terms of the base currency.
– The pip value can vary depending on the specific currency pair and the trade size (lot size).

Understanding how to calculate pip values is crucial for forex traders to determine their potential profits and losses.

When trading in the global forex market, it’s important to understand how to calculate the pip value in terms of your trading account’s currency. This is crucial because not everyone has their account denominated in the same currency as the currency pair they are trading.

The formula to convert the pip value to your account’s currency is:

(Found Pip Value) x (Exchange Rate Ratio of Account Currency to Currency Pair)

Let’s go through some examples:

Example 1: Converting GBP/JPY Pip Value to USD

In the previous example, we calculated the pip value for GBP/JPY as 0.0000813 GBP per unit traded.

Assuming your trading account is denominated in US Dollars (USD), and the current exchange rate for GBP/USD is 1.5590, we can calculate the pip value in USD as follows:

Pip Value in USD = (0.0000813 GBP per pip) x (1 USD/1.5590 GBP)
Pip Value in USD = 0.0001312 USD per pip

So, if you were trading 10,000 units of GBP/JPY, a one-pip change in the exchange rate would result in a \$1.31 change in the position value (10,000 units x 0.0001312 USD/unit).

Example 2: Converting USD/CAD Pip Value to New Zealand Dollars (NZD)

Earlier, we calculated the pip value for USD/CAD as 0.00009804 USD per unit traded.

Assuming your trading account is denominated in New Zealand Dollars (NZD), and the current exchange rate for USD/NZD is 0.7900, we can calculate the pip value in NZD as follows:

Pip Value in NZD = (0.00009804 USD per pip) x (1 NZD/0.7900 USD)
Pip Value in NZD = 0.00012405 NZD per pip

So, if you were trading 10,000 units of USD/CAD, a one-pip change in the exchange rate would result in a \$1.24 NZD change in the position value (10,000 units x 0.00012405 NZD/unit).

Most of the forex brokers will automatically calculate the pip value in your trading account’s currency, but it’s still valuable to understand the underlying calculations. This knowledge will help you better manage your forex trades and risk.