Understanding pips in forex
What is a pip in forex trading? A pip in forex is a precise representation of price, showing the trader exactly how much a currency or currency pair is currently worth. Upwards pip movements show that the pair grew in value, while downward movements indicate the opposite.
Even smaller values are used to represent the value of a currency or a currency pair with even greater precision. These are known as pipettes or points, and they are a tenth of the size of a pip - ten of these smaller values equals one pip. The pip will be the smallest thing you’ll see on the dashboard and the last figure in the quoted value you see on the screen.
How to calculate pips
In most cases, a pip represents a movement at the fourth decimal place. This is true of many of the most frequently traded currencies in the forex market. For instance, if the Australian dollar moves up in value by 0.0001, this is a growth of 1 pip. This is also the case of the US dollar.
In other cases, however, it's different. A pip will be at the second decimal place for currencies available in very small dominations. So, a movement of 0.01 on the Japanese yen - typically much smaller in value than one Australian dollar - would equal one pip.
Outside the forex market, pips may be represented differently. A pip in a precious metal commodity like gold will be at the third decimal place (0.001), while crypto pips tend to be at the first decimal place (0.1).
Here's an example:
Let's say you want to make a 10,000 euros trade against a EUR/USD currency pair, which features a fixed pip of 0.0001 - 10,000 multiplied by 0.001 is 1, which means the pip value is $1. If you bought 10,000 euros against the US dollar at 1.810 and sold at 1.820, you would receive a profit of 10 pips or $10.
How to use pips in forex trading
Take a look at a few key use cases, and learn more about how to use pips in your forex trading strategy.
Futures and forwards trading
Protecting your positions
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In most cases, one pip is a movement at the second decimal place of the quote. So, if the quote currency is the Australian dollar, a movement of one pip will be worth less than the same movement on a British pound quote currency - simply because one unit of GBP is worth more than one unit of AUD.