Pips are used to represent the profitability of an investment. In some cases, it will suffice to reflect the profitability in a certain currency. However, when we compare the results of different (international) investors, this becomes difficult. The trading results are quoted in a certain currency, and because the currency exchange rates differ widely, it is better to view the results in pips.
What are pips?
The word pip stands for percentage in point. Pips are used to represent the smallest possible changes in the exchange rate of a currency. In most currency pairs, this number is displayed in four decimal places. When the EUR/USD pair rises from 1.1210 to 1.1211 the currency pair rises with one pip.
How much is a pip worth?
The value of a pip varies greatly from currency pair to currency pair. In many currency pairs, a pip indicates the change of a fourth decimal place. However, there are also currencies like the Japanese Yen which are quoted in only two decimals: the value of a pip is different in this situation.
The difference is 0,7 pips or 0.0007
It is quite easy to calculate the value of a pip. To do so, multiply the amount of the position by the number of decimals after the comma. This is the amount you’ll earn when the price rises with a pip.
For the currency pair EUR/USD you calculate the value of one pip as follows: EUR/USD 100,000 * 0.0001 = $10. One pip then equals ten American dollars.
How do you determine the transaction costs with pips?
At many Forex brokers, the transaction costs are indicated in pips. For many new traders, it can be difficult to understand how high the fees are that they have to pay. On the currency pair EUR/USD you’ll sometimes have to pay one pip of transaction fees. Luckily, you can easily calculate how much your transaction costs are.
One pip in transaction cost equals 0.0001. You can then multiply this amount by the total value of your transaction. For example, if you invest with $1,000, your transaction costs are $1,000 X 0.0001 which equals %0.10. As you can see, the transaction fees do not have to be high when trading in currencies. In this article you can read more about the transaction costs you pay when you trade Forex.
Pips in practice
With PIus500 you can trade Forex by using CFD’s. Let’s illustrate how pips work with an example. If you trade with $100,000 and the transaction costs are 2 pips then the transaction costs in are 0.0002 X $100,000 = $20.00. When you understand pips you can easily calculate transaction fees and the results on investments.
Pips to two decimal places
In most currency pairs, the pips are determined based on four decimal places. There are also currency pairs that are quoted in fewer decimal places. The best-known example of this is the Japanese Yen. On the Japanese Yen, the value is kept up to two decimal places. An increase from 90.20 to 90.30 is an increase of 10 pips. Pips are also calculated in this way for raw materials such as gold and oil.
What are pipettes?
Trading with a broker is becoming increasingly cheaper: at many providers, the transaction costs have fallen to, for example, 0.5 pips. We also call these small amounts of pips pipettes. A pipette is part of a pip. 0.5 pips or 1/2 pip can also be called 5 pipettes.
With the Japanese Yen, we call the third digit after the comma a pipette.
What is the Forex pip value of each currency pair?
The value of a pip differs per currency pair. The quote currency is the determining currency when determining the value of a pip. Below we mention how much a pip is worth for each currency pair when you invest 100.000:
- EUR/USD: 10 dollar
- GBP/USD: 10 dollar
- USD/JPY: 1000 Japanese yen
- USD/CAD: 10 Canadian dollars
- USD/CHF: 10 Swiss francs
- AUD/USD: 10 dollar
- NZD/USD: 10 dollar
Why are pips important?
Pips are especially interesting when you want to compare trades with different volumes and in different currencies. Everyone trades with different amounts. When you invest with $1000,00 a profit of $100,00 is more impressive than when you trade with $10.000,00. With pips, you always see the result without the trading volume playing a role.
With most modern brokers, profit and loss are simply stated in your currency, so you won’t be faced with any nasty surprises.
Calculate your profit or loss in 3 steps
With this step-by-step plan, you can quickly determine how much profit or loss you have made.
Step 1: Calculate how much of the quote currency each pip represents. When you’re trading EUR/USD with 100.000 then the value of one pip is 100.000 X 0,0001 = $10.
Step 2: subsequently calculate the amount in the base currency or your currency. You do this by dividing the amount by the applicable exchange rate. If you trade in EUR/USD and you want to know the result in euros, you have to do this calculation. At the time of writing, it is 0.9: in euros, the value of a pip will thus be €9.
Step 3: By following these steps, you can easily calculate your trading result. When you've made a profit of 100 pips your total profit would be 100 X €9 which equals to €900. Of course you can calculate a possible loss in the same way.