What is a PIP?

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When you decide to enter the interesting universe of trading, you will find that there is a whole world of new terms that may sound strange if you have not learned them. However, it is essential to understand the operation and technical jargons of these financial instruments.

The word PIP is an abbreviation which means “point in percentage”, or simply called “points”. This term is widely used when trading in the foreign exchange market (Forex) or the stock market. It is known that these markets are based on small margins to generate profits, therefore it should be traded on small market movements.

When you are trading Forex, what you are doing is calculating the strength/ value of one currency against another through speculation. Therefore, when matching these currencies, four decimals are usually used, for example, EUR/USD = 1.1225, which means that each euro has a value of 1.1225 dollars. So what is a pip? Well, in this case, a pip will always be the movement of the fourth decimal of each pair.

Let’s look at the following example:

If we have EUR/USD = 1.1225 and it changes to EUR/USD = 1.1227, it means that the market has increased by two pips as this digit has changed from 5 to 7, the same happens when it decreases, we would say that the value of the euro against the dollar has fallen two pips (if it fell to 1.1223).

To calculate it, we only have to multiply 0.0001 by the size of the desired position, in this way, position size * 0.0001 = 1 pip. Therefore, if we open a position of 4000 units, the calculation should be as follows:

4000 * 0.0001 = 0.4 USD, so for every market movement in buying or selling a position of 4000 units, the user will earn or lose $0.4 for each pip or percentage point moved.

It is important to keep in mind that the formula above works with almost all the most popular pairs, except when you trade with Japanese Yen, in this case, you should focus on the first two decimals, for example, USD/JPY = 115.45, the calculations should be based on 45 (the first two decimals). For the other pairs, it is always essential to rely on the fourth digit to calculate the pips, including the stock market; some brokers offer up to five decimal places to give more accurate calculations, but it is also the fourth digit that matters in most cases.

References: 

  • WHAT IS A PIP OR POINT | TRADING TERMS
    (What is a Pip or Point | Trading Terms, 2020)
    What is a Pip or Point | Trading Terms. 2020. .

    ¿QUÉ ES UN PIP? APRENDA Y MEJORE SU TRADING | AVATRADE
    (¿Qué es un PIP? Aprenda y Mejore su Trading | AvaTrade, 2020)
    AvaTrade. 2020. ¿Qué Es Un PIP? Aprenda Y Mejore Su Trading | Avatrade. Available at: <https://www.avatrade.es/educacion/trading-para-principiantes/que-es-pip> [Accessed 6 May 2020].
  • https://www.youtube.com/watch?v=bE0ZlUMmGXo&list=PL_qZbVTmPuY8viMc5O2uZSN9uFW2E500M&index=10&t=0s

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