What Are Pips And Pipettes In Forex?

If you are new to the world of forex trading, you may have heard a lot of terms thrown around that you might need to be completely familiar with. Some of these terms can be “pips”, “pipettes”, “points”, and “pip value”, and in this article, we are going to discuss them.

In order to understand how the exchange rates move, how to calculate profit or loss for a trade and how to manage risk, it is important to understand the concept of pips. So let’s get started!

What are Pips in forex?

By definition, PIP, which stands for “Percentage in Point '' or “Price Interest Point '',  is a unit of measurement used in the foreign exchange market to indicate the change in value between two currencies.

It is equivalent to the smallest movement that a currency pair can make. The number of pips a pair goes up or down decides whether you have made a profit or loss. For this, you can use a pips calculator as well, which helps in figuring out the pip value of the currency you wish to trade.

Typically, a PIP is the last decimal point of a price quote.

Some currency pairs, like EUR/USD, GBP/EUR or GBP/USD etc., are priced up to 4 decimal places, meaning the smallest move these currency pairs can make can be represented by 0.0001.

On the other hand, USD/JPY or CAD/JPY, basically Japanese Yen quoted pairs, only go out to two decimal places. In this case, the smallest increment or change in the rate of the currency pair will be indicated by 0.01

Let’s understand this through an example:

If the EUR/USD currency pair moves from 1.2000 to 1.2001, that would be a one-PIP move. And if you're trading with a standard lot of 100,000 units, a one PIP move would result in a $10 profit or loss (assuming you bought at 1.2000 and sold at 1.2001).

That’s a little maths to do here! But understanding how PIP works is important to calculate the profit or loss of trade and to set stop-loss and take-profit levels correctly.

What are Pipettes in forex?

Although quoting currency pairs up to 2 or 4 decimal places is standard practice, it’s not uncommon to see brokers who have gone beyond this usual norm and started quoting the currency pairs out to 3 or 5 decimal places to offer even tighter spreads.

While the 2nd or 4th decimal place is referred to as a “PIP”, the 3rd and 5th decimal place is known as “Pipette.”

A Pipette represents the fraction of a pip and is equal to one-tenth of a PIP, hence, it got another name for itself, which is “Fractional pip”. Some traders also call it “Point” or Superscript pip. This means that pipettes are an even smaller unit of measurement used in the forex market to indicate even smaller changes in the value of a currency pair.

While a PIP is typically equal to 0.0001, a pipette is equal to 0.00001.

Pipettes give a microscopic view of the rate of currency pairs in the forex market. It allows traders to zoom in and focus on even the tiniest movements of the currencies.

Some brokers use pipettes to provide even more precision in the pricing of currency pairs, and they are especially useful for traders who like to take advantage of small price movements.

However, it’s worth noting that not all brokers use pipettes. Some still stick to the traditional method, which involves using PIPs.Therefore, it's always good to check with your broker to see if they use PIP or Pipettes as a unit of measurement.

To understand what a Pipette is, let's revise our previous example, but this time we will expand the calculation up to the 5th decimal place.

If the EUR/USD currency pair moves from 1.2000 to 1.20001, that would be a one-pipette move represented by 0.00001, which is one-tenth of a PIP.

In this scenario, a one-pipette move in a standard lot would result in a profit or loss of $1.

How to Calculate the Value of a Pip and the Profit/Loss of a Trade?

Here comes the interesting part about pips.

Since PIP is the smallest change in the value of a currency pair, one imagines that pips are tiny in value, but that’s a partial truth. The value of a PIP is defined by a lot of factors, such as, the size of the trade, currency pair being traded and exchange rate of the pair, and its value can fluctuate depending upon these factors.

In leveraged trades, the smallest change in the pip value can considerably influence profit and loss for a given trade.

To calculate the PIP value of a currency pair in the forex market, I’d suggest using a pip calculator for fast and accurate calculations, but you can also calculate the pips using the following formula:

Value of pip = (0.0001 / Exchange rate) x  Position size

Let’s understand this through an example.

Imagine you buy a standard lot of EUR/USD pair at a price of 1.2563. The next day, the price of the EUR/USD moves up to 1.2583, which is a change of 20 PIPs. Huge, right? So, you decided to close the position at 1.2583 and book a profit.

By now, you must have understood that PIP does not represent cash value, so we need to calculate profit and loss to know how much it is in dollars, but before that, we should know the PIP value.

So let’s  find out the pip value first:

Value of pip = (0.0001 / Exchange rate) x  Position size

Value of pip = (0.0001 /1.2583) x  Position size

For a standard lot, The number of units of base currency is 100,000:

Therefore, the value of a PIP will be:  (0.0001 /1.2583) x  (100,000) = 7.94 USD

Now that we know how much one pip is worth in this particular trade, we can easily calculate the total profit, by using this formula:

Total profit/loss = Value of pip x Amount of pips

Total profit: 20 pips x 7.94 USD = 158.8 USD

You can also use this formula to calculate the pip value of other currency pairs.

However, it should be noted that the above formula is based on the assumption that you are trading one standard lot. However, you can adjust the number of units to reflect your trade size.

Also, the above formula uses a pip value of 0.0001, the standard pip value for most currency pairs. However, some pairs, like the JPY cross, may have different pip values.

Typically, a standard lot is worth $10 per pip, a mini lot is worth $1 per pip, a micro lot is worth $0.10 per pip, and a nano lot is $0.01 per pip.

This means that if you buy one standard lot of EUR/USD at 1.3125 and it increases to 1.3135, your profit would be $100.

Wondering how?

Value of 1 PIP in standard lot = $10

Value of 10 PIPs in standard lot = 10 pips x $10 per pip = $100.

How to Use a Forex Pip Calculator?

Knowing how to calculate pip values is an essential skill for any forex trader, but these days it has become super easy with a forex calculator to calculate the value of a pip and profit/loss on a position.

A pip calculator is one of the many trading calculators that are used by traders to simplify trading. Pip calculators can help you quickly find the value of a pip and calculate the profit or loss from a trade. By entering the instrument, lot size, number of lots, pips and lot type, one can determine the PIP value without doing any manual calculations.

Conclusion:

PIPs and Pipettes can be seen as the scoreboard of the foreign exchange market. Every small change in the value of a currency pair can be gauged by looking closely at the changes in the PIP value. Just like a good player would keep track of the score of a game and plan his next move accordingly to be on the winning side, a good forex trader would do the same based on PIPs. Forex traders can monitor PIP value fluctuations and strategise their trades to be profitable.