What are pips and pips in forex, what are they for and how to calculate them
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Pips in trading is a unit for displaying fluctuations of currency pairs, metals, hydrocarbons, indices etc. And this is the minimum of what you can lose or earn on Forex.
Traditionally, in a stock exchange summary you will see a pip in the fourth place after the decimal point. Let's say you're interested in the USD/RUB currency pair (meaning you're buying dollars for rubles). However, in recent years, a pip has been labelled as the fifth decimal place, and the fourth decimal place is more commonly referred to as a pip.
USD/RUB = 75.76600 is a pip
If the exchange rate changes from 75.76600 to 75.76601, it will mean that the USD/RUB exchange rate has increased by one pip.
In some cases, a pip is indicated by the third digit after the decimal point. For example, to display the dollar exchange rate in Japanese yen.
USD/JPY = 104.108
What is a pip, pip and tick?
Beginners (and sometimes even professional traders) are often confused about such concepts as pips and points in forex, and tick is often added to this confusion. Let's take a closer look at all the concepts. First of all, let's look at the difference between pips and points.
Although everything is very simple: one point in forex consists of ten pips and is displayed in quotes as the fourth digit after the decimal point.
Therefore, if you are wondering how to calculate the value of a point on forex, just multiply the value of a pip by 10, and how to calculate the value of a pip, read on.
USD = 75.76600
The situation with a tick is quite different than with a pip and a pip. A tick is the minimum price movement of a currency. During one tick the price can rise or fall by 1 pip or 0.1 pip, or by 10 pips. Thus, if the minimum step for EUR/USD is 0.00001, then for USD/JPY this step is 0.001, and for DXY - 0.005.
What is a pip in trading?
Sometimes traders come across the term "pipette", but this is just a jargon definition of a pip that traders use in conversations on forums and social networks. You will not find such a concept in the official literature.
Why do we need pips in trading?
The saying "Time is money" describes the reason for pips in trading as best as possible. A pip is a tool that allows you to track the flow of quotes in near real-time mode and organise faster and cheaper execution of trades on the market. For example, the speed of trade execution in FxPro is most often less than 11.06 milliseconds, and spreads can be only a few pips.
What does the cost of a pip depend on?
One of the main questions of novice traders is: "A pip - how much money is it?"
Each currency has its own relative value, so to calculate the value of a pip, you need to know several factors:
- the volume of the transaction being made,
- the currency of your deposit,
- what currency pair you are trading. For example, EUR/USD is a pair where the euro is the currency being bought and the dollar is the currency being sold. Instead of a currency pair, there may be other trading instruments such as metals, indices, stocks or cryptocurrencies.
How to calculate the value of a pip (pip) in forexHow to calculate the value of a pip (pip) in forex
In order to fully understand this question, we need to look at several variations of trades. Usually examples are given for the calculation with points, the cost of a pip is calculated similarly, you just need to divide the result is not 10.
Calculating the cost of a pip when trading with deposits in U.S. dollars
For direct quote
Direct quote: the dollar is the quoted currency, i.e. you buy US dollars for any other currency (USD/XXX).
Every time you trade from a dollar deposit (account) and buy any currency for dollars, your pip will be equal to 0.0001 of the amount.
Suppose you make a trade for 10,000 (0.1 lot) US dollars, a pip will always be equal to one US dollar:
Point = 10,000 * 0.0001 = 1.
No matter if you buy Swiss Francs, Yuan or Rubles with this 10,000 USD, the pip will remain at the level of one USD.
For the reverse quote
Reverse quote: the US dollar in these is the base currency, meaning you buy any currency with US dollars (XXX/USD).
Every time you trade from a dollar deposit (account) and buy US dollars for another currency, you should multiply the volume of the transaction by 0.0001 and divide by the exchange rate of the currency pair. The received number will be the cost of a point.
Let's consider an example with USD/RUB exchange rate equal to 75.7660 and a transaction volume of 10,000 (0.1 lot) US dollars:
Point = 10,000 * 0.0001 /7 5.660 = 0.01321
0.01321 USD is the pip value in these conditions.
Calculation of a pip when trading from non-dollar deposits
If the deposit is in the base (traded) currency
If you are going to use a non-dollar deposit to buy another currency, know that your pip will have a fixed value.
Let's say you have an account in CHF Swiss Francs, the currency volume in the transaction is 10,000 (0.1 lot) CHF and you want to buy EUR. In this case, your pip size will be equal to 1 CHF. In the same transaction with a currency volume of CHF 100,000 (1 lot), your pip size will be CHF 10.
What will change in the pip value if the currency to be bought is not EUR EUR, but AUD AUD? Absolutely nothing: if the volume of funds in the transaction is CHF 10,000, the pip value will remain CHF 1.
If the deposit is in a quoted (buyable) currency.
For simplicity, we will continue to use the CHF Swiss franc as an example. Suppose you buy CHF for Polish zloty PLN. You need to multiply the volume of the trade (e.g. 10,000 or 0.1 lots) by 0.0001 and then divide it by the CHF/PLN exchange rate (e.g. 4.1336). The result will be:
Point = 10,000 * 0.0001 / 4.1336 = 0.2419
The cost of a pip when trading the yen
And now we need to consider the case of the Japanese Yen JPY, as its pip is equal to 0.01, not 0.0001. Let's assume the GBP/JPY exchange rate is 140.07 and the currency volume is 10,000 (0.1 lots). Then we need to perform the same actions as in the case of CHF/PLN, but replace 0.0001 with 0.01. The result will be:
Point = 10,000 * 0.01 / 140.07 = 0.7139
Today, a rare forex trader calculates the cost of a pip, and therefore the cost of a pip manually. Neither beginners nor experienced traders - nobody wants to waste their precious time on this. That is why there are a huge number of online calculators on the Internet. FxPro Company also offers an opportunity to use its own proven pips cost calculator.
What is pipsing?
Professional traders call pipsing ultra-short trades. A pips trader expects a small growth of his currency rate, for example, only 10 pips, and quickly closes the deal. Many traders perform such operations several times a day.
Pipsing techniques are also used for high-frequency trading, where trading robots work instead of traders, and the number of concluded deals is measured in hundreds and thousands per hour.
Advantages and disadvantages of pipsing
First of all, when pipsing, a trader practises the skills necessary for working with other strategies. And one of the most important qualities of a trader for profitable trading with such TS is equanimity when losing and gaining profit. Emotions are one of the main enemies of trading.
In order to master Forex pipsing, you need not as much time as for other types of trading. People with good analytical data quite quickly calculate the algorithms of currency pairs fluctuations. However, from the constant observation of the market, prices and a lot of open trades, there can be a lot of stress, which often leads to mistakes. That is why it is not recommended for beginners to use pips.
Loss of responsibility also leads to mistakes, because the losses are not so great. Nevertheless, pipsing is a very useful skill for a trader, which is worth mastering.
We have learnt how to distinguish a pip from a pip in forex, we have learnt that not all pips are the same and their value differs depending on the conditions. Pips trading is an interesting, but rather risky style of trading, as the work takes place actually in the mode of market noise. You should be well prepared for such trading in order to make quick decisions or use a trading robot.