In the world of forex trading a pip is one of the most fundamental concepts for traders to understand. In forex, Pip stands for percentage in points which is referred to as the smallest measurement unit. This unit is used to calculate the change in the value of a currency pair.
Most pips, except some, represent a movement in the fourth decimal place of the currency pair while the Japanese yen (JPY) represents a movement in the second decimal point. For example, if EUR/USD changes from 1.1181 to 1.1182, that 0.0001 change is called one pip.
Pip helps in measuring price movement, profit, and loss during forex trading. You can use this term to make communication easy and consider it as the universal standard.
Method to calculate Pip value
The method to calculate pip value depends on whether the USD is the base currency or the quote currency in the pair. It mainly depends on the trade value and currency pairs. In both cases, different formulas are used.
For USD as the base currency
Pip Value = (Pip Size ÷ Exchange Rate) × Trade Value
Ex, USD/GBP currency pair
For USD as the quote currency
Pip Value = Quote Currency Pip × Trade Value
Ex, GBP/USD currency pair
Some forex traders also use pipettes in their trading. It is a 1/10 of the pip value and represents a currency movement in the fifth decimal point.
Conclusion
Forex trading is getting lots of attraction because of its more dynamic and unbiased nature compared to other markets. But before trading in these currency markets it is important to get some essential information about pip value. The above guide from Top Forex Brokers will help you understand this concept of pip and execute this in your impactful strategy to make incredible returns.
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