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META TRADER 4
What Is a Pip?
Pip is an acronym for “percentage in point” or “price interest point.” A pip is the smallest price move that an exchange rate can make based on forex market convention. Most currency pairs are priced out to four decimal places and the pip change is the last (fourth) decimal point. A pip is thus equivalent to 1/100 of 1% or one basis point.1
For example, the smallest move the USD/CAD currency pair can make is $0.0001 or one basis point.
What Is A Pip?
How Pips Work
A pip is a basic concept of foreign exchange (forex). Forex pairs are used to disseminate exchange quotes through bid and ask quotes that are accurate to four decimal places. In simpler terms, forex traders buy or sell a currency whose value is expressed in relationship to another currency.
Movement in the exchange rate is measured by pips. Since most currency pairs are quoted to a maximum of four decimal places, the smallest change for these pairs is 1 pip.
For example, a trader who wants to buy the USD/CAD pair would be purchasing US dollars and simultaneously selling Canadian dollars.
Japanese yen (JPY) pairs are quoted with 2 decimal places, marking a notable exception.1 For currency pairs such as the EUR/JPY and USD/JPY, the value of a pip is 1/100 divided by the exchange rate. For example, if the EUR/JPY is quoted as 132.62, one pip is 1/100 ÷ 132.62 = 0.0000754.
Pips and Profitability
The movement of a currency pair determines whether a trader made a profit or loss from the positions at the end of the day. A trader who buys the EUR/USD will profit if the euro increases in value relative to the US dollar.
Now, let’s consider a trader who buys the Japanese Yen by selling USD/JPY at 112.06. The trader loses 3 pips on the trade if closed at 112.09 but profits by 5 pips if the position is closed at 112.01.
While the difference looks small in the multi-trillion dollar foreign exchange market, gains and losses can add up quickly. For example, if a $10 million position in this set-up is closed at 112.01, the trader will book a $10 million x (112.06 – 112.01) = ¥500,000 profit. This profit in US dollars is calculated as ¥500,000/112.01 = $4,463.89.
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The information contained here and the resources available for download through this website is not intended as, and shall not be understood or construed as, financial advice. I am not an attorney, accountant or financial advisor, nor am I holding myself out to be, and the information contained on this Website is not a substitute for financial advice from a professional who is aware of the facts and circumstances of your individual situation.
We have done our best to ensure that the information provided here and the resources available for download are accurate and provide valuable information. Regardless of anything to the contrary, nothing available on or through this Website should be understood as a recommendation that you should not consult with a financial professional to address your particular information. The Company expressly recommends that you seek advice from a professional.
*None of this is meant to be construed as investment advice, it’s for entertainment purposes only. Links above include affiliate commission or referrals. I’m part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.