Traders use PIPs in forex to express volatility in the market. They even measure their winning in PIPs. For example, a trader states if he has made a certain amount of PIPs or has lost.
PIP stands for “Percentage In Point” or “Price In Interest” and is the smallest measurement unit of price changes in a pair of currency or CFDs.
PIPs in Four-digit and Five-digit Brokers
There are two types of brokers, four-digit and five-digit brokers.
In a four-digit quote, one unit change in the last decimal place represents one PIP change. Or, in simple terms, for every pair excluding pairs that contain Japanese Yen, 0.0001 represents one PIP, and 0.0002 represents two PIPs. For instance, if (GBPUSD=1.1720), it means, one GBP is worth $1 and 1720 PIPs in USD. In other words, 10,000 PIPs equals 1 unit of the quote currency.
In a five-digit quote, the last place represents a point of PIP (also known as pipettes). For example, 0.00001 represents one point of PIP, and 0.00012 represents 1.2 PIPs.
For Japanese Yen pairs, quotes are two-decimal or three-decimal.
In Japanese Yen pairs, a standard quote has two decimal places, and one unit change in the first digit from the right place represents one PIP change.
In a three-decimal quotation, one unit change in the second digit represents one PIP change.
For example, if (USDJPY=104.450), it means, $1 is worth 104.45 JPY. If, the price increase to (USDJPY=104.550), the price has risen ten PIPs.
How to Calculate the Value of PIPs in Forex?
Pip in different pairs worth different amounts of dollars. GBP pairs have more values than AUD pairs. These value changes as the price of currencies change.
You don’t need to calculate the PIPs value every day or moment. As you place a trade, the trading software calculates it for you automatically.
However, understanding the calculation method will help you understand the forex market better.
Calculating the formula is very simple, and it is like this.
PIP Calculation Formula: (One pip)*(pair’s quote) = (base currency price)
(0.0001)*(pairs quote) = (base currency price)
Example of PIP Value Calculation
Let’s calculate one pip value of (USDCAD=1.3622)