A pip is an acronym for Percentage in Points. But few use this definition. Usually traders refer to it as the smallest incrementing step for a price movement. In other examples I presented the price for EURUSD with four digits.

A pip is the minimum step the price of a EURUSD currency pair can move and calculated to equivalent to 0.0001. If the price moves from 1.1100 to 1.1101 it means that it moved 0.0001. Most currency pairs have four digits. For this particular currency pairs, 1 pip equals 0.0001, 10 pips equals a movement of 0.0010, 100 pips equals a movement of 0.0100 and so on.

In view of the liquidity (amount of money traded each day) of this market increased a lot in the past few years, while the spreads have diminished considerably. Therefore, a fifth digit can be seen on many trading platforms. The fifth digit is a tenth of the Pip's value and it is termed a Pipette. When measuring a move on a platform with 5 digits, you will see 10 pipettes for one pip, 100 pipettes for 10 pips and so on.

I have received a number of questions about this issue in my educational events, for this reason I outlined this definition for the benefit of your knowledge. Traders use pips as a substitute for real money, for two main reasons: 

• Firstly, to simplify the calculation of the distance between one price level to another. This also provides clarity when a forecast is made. If you assume that EURUSD will change from 1.1100 to 1.1125, you can expect a 25 pips move in favor of the Euro. As a consequence you may find yourself using five digits, which can often be an unpleasant experience. 

• The second is psychological. In other articles I will delve into a discussion of the relationship between the trader and money. Traders usually set the platform to display profit and loss in pips to remain as detached as possible from that trade. It is a method that can be useful for beginners.        

A Pip has a value in money

It is very imperative when setting the amount we can allow the price to go against us (depending on how much money you willing to risk on a trade), or cut profits when it becomes obvious the price could reverse and go against us. The term pip is also used in other types of CFD trading like commodities, indices, ETFs or Stocks, but it is easiest to calculate for the Forex Market.

As discussed a pip is the equivalent of 0.0001 for the 4 digit currency pairs (or 0.00010 for 5 digit currencies). The value in money for one pip strictly depends on the trading volume. If you trade EURUSD and want to calculate the value of a pip, you can use the following formula:

Value of 1 pip = 0.0001 (minimum step) * 1 (volume traded, we take for example 1 lot) * 100.000 (the nominal value of one lot) = 10 $ (the currency is given by the second currency in the currency pair).

A shorter version is to remember that if you trade EURUSD the pip values are the following, depending on the volume:

For 0.01 lots: 1 pip = 0.1$;

For 0.02 lots: 1 pip = 0.2$;

………………………………………..

For 0.1 lots: 1 pip = $1;

For 0.2 lots: 1 pip = $2;

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For 1 lot: 1 pip = $10;

For 2 lots: 1 pip= $20, and so on.

As described, the currency for the pip value is given by the second currency of the pair. If one lot of EURUSD one pips is equivalent to 10 dollars, for 1 lot of EURGBP one pip is equivalent to 10 pounds, for 1 lot of USDCAD one pip is equivalent to 10 Canadian dollars and so on.

We have discussed the currency pairs which have 4 digits. However, there are some like the ones containing the Japanese yen (EURJPY, GBPJPY, USDJPY, AUDJPY, etc.) that has two digits only. For example USDJPY's quotation is 122.40. This means that 1 pip is equivalent to 0.01 movement. The formula remains the same, but the numbers will be a little different. 1 pip of 1 lot traded on USDJPY is equivalent to 1000 Japanese Yen (0.01*1lot*100.000 JPY = 1000 JPY). 1000 Japanese Yen divided by 122.4 is approximately of $8.17, so the actual value of one pip traded on USDJPY (or other currencies mentioned above) is lower than the value of one pip traded on EURUSD. For these currency pairs there are also pipets. When the price has three digits for the currency pairs which have the Japanese yen, you should note that the third is a tenth of a pip.