Pip works as a representation of a small change in a currency pair. It is known as point percentage, a unit of measure used by investors in forex tradings. It marks even the tiniest of a variation between a currency pair. The single-digit move at the fourth decimal exhibits it.
Understanding What’s Pip?
One can understand it through the underlying currency or a quote. It is the smallest and a standardised unit that can force a currency quote to change. For example, take GBP/USD as a currency pair in consideration. And suppose its price motions to 2.1503 to 2.1504, the change would get represented as a point or a pip movement.
Although, it is not the case with other currencies and the Japanese Yen is one such exception. Generally, it is associated with the US dollar currency pairs. $0.0001 also gets referred to as the one-hundredth part of one percent or a basis point. The touchstone size reflects the upcoming risks to investors and protects them from a potential loss. Even a single pip can bring about sharp movement in currency pairs.
How To Calculate a Pip’s Value?
For calculating the value of a pip, multiply the contract size or a specific lot with one pip (0.0001). It will be 1,00000 units for standard lots (base currency), while it would be 10,000 units for mini lots. For example, while glancing over EUR/USD, the movement of one pip in a standardised contract is equivalent to $10 (0.0001 * 100 000).
By calculating the valuation of a single pip assists forex traders in keeping a pecuniary value on their stop loss levels and profits aimed by them. This way, traders can directly find out how the value of their equity will move around with the movement of the currency market. It is better than determining the move in pips.
It is noticeable that the value of pip will be different for each currency pair. The currency of the quote (variable currency) will showcase the valuation of 1 pip. While trading CHF/GBP, the value of one pip will get displayed in GBP, while in the case of USD/JPY, JPY will show it.
Conversion of Pip Value
If someone has an account based in GBP, in that case, the person would have to convert the value of $1 (10k EUR/USD lot) in Great British Pounds. For this, one can divide the current exchange rate of GBP/USD by $ 1. Suppose it is 1.2689. The division is necessary, for the value of the pound is worth more than the USD. 1 divided by 1.2689 is 0.7880 pounds.
So, the value states the profit or loss earned by a person on a loss of one 10k lot.
Learn About The Exception
Traders need to keep one thing in mind while trading other currencies with the Japanese Yen that the pip becomes the second decimal from the existing fourth one. The reason for it is the lower value of the Japanese Yen compared to the major currencies.
While trading standard contracts aka 100k and mini contracts aka 10k, the value of one pip would amount to JYP 1000 and JPY 100 respectively.