Even experienced traders often get confused about how to correctly calculate pips in Forex trading.
Today, we’ll figure out the history of this question, and you’ll never be confused again about what exactly is considered a pip in currency quotes. Also, I’ll share a life – hack on calculating the value of a pip without a calculator.
What is a Pip?
In economics, a pip represents the smallest indivisible value of a calculated indicator. That is, (in many cases) it is the last digit in its measurement or the minimum possible fluctuation:
- Of an index
- Of a currency pair
- Of stocks, securities, derivatives, and other financial instruments
The term “pip” comes from the Latin word “punctum” – “point”. Traders use the slang term “pip” (from the English “percentage in point”, which means “the corresponding percentage share”).
A pip represents the smallest normal increase in the currency price and is equal to 1/100 of 1% of the smallest unit of the currency (cent, penny, kopeck, etc.).
For most currency pairs, 1 pip is equivalent to $0.0001, that is, the fourth digit after the decimal point.
Traders should not be confused by the difference between the terms “pip” and “point” – in the context of finance, they mean the same thing.
However, confusion arises regarding the number of digits after the decimal point in currency pair quotes. Why is it the fourth digit and not the fifth? Because a pip is 1/100 of 1% of the smallest unit of the currency, most often a cent. Where are the cents? The first two digits after the decimal point, for example, 1.32. What would 1/100 of a cent look like? Correct, the fourth digit after the decimal point, for example, 1.3201.
So, where did the fifth digit come from?
Pips and Pipettes, Old and New Pips
In the Forex market, confusion often occurs in definitions such as “pips”, “pipettes”, “old and new pips”. Let’s look at these terms in more detail.
Pips and Pipettes
One of the sources of confusion is the term “pip” and its fractional version, known as “pipette”. The basic idea is that a pip is the smallest change in the currency price, and it represents 1/100 of a percent of the smallest unit of the currency (cent, penny, kopeck). In most cases, 1 pip is equal to $0.0001.
Just a few decades ago, the fifth digit after the decimal point in Forex quotes did not exist, so no one was confused. To offer narrower spreads, the American broker Oanda introduced the fifth digit after the decimal point. Thus, the concept of “pipette” emerged, which is equal to 1/10 of a pip. So, 1 pipette is $0.00001.
Old and New Pips
The main source of confusion is related to the fact that in the Russian – speaking segment, beginners often consider “pips” not as 1/100 of a percent, but as the change in the fifth digit after the decimal point.
Old pips refer to the minimum price change in quotes with four decimal places (after the decimal point), while new pips refer to the minimum price change in five – decimal – place quotes.
The first Forex brokers only worked with four – digit currency quotes. Hence the name “old pips”.
The appearance of accounts with narrow spreads – less than a pip – required brokers to introduce five – digit quotes. And novice clients mistakenly called the change in the fifth digit a pip. In fact, the fifth digit is a pipette, one – tenth of a pip.
For example, for a 4 – digit broker, the EURUSD quote may be 1.3367, while for a 5 – digit broker, it will look like 1.33670.
When discussing trades and reports on forums, in books and articles, both Russian and foreign, it is customary to use “old pips” (4 digits) to avoid misunderstandings.
For example, if you see that in a strategy review, a stop – loss of 45 pips is recommended, it means that 4 digits after the decimal point are meant – 0.0045.
So,
- “Old pips” – 4 digits after the decimal point;
- “New pips” – 5 digits after the decimal point.
How to Calculate Pips in the Forex Market?
When it comes to how many pips the price has moved, the simplest way is to ignore the fifth digit after the decimal point. This method is similar to what you do in a store when a loaf of bread costs 50 rubles and 30 kopecks. You don’t pay attention to the kopecks; for you, the bread costs 50 rubles. It’s the same with pips: just ignore the fifth digit.
You may also come across the term “figure”.
A figure is a price movement up or down by 100 pips.
And, of course, we are talking about “old pips” here.
How to Calculate the Value of a Pip?
Now, let’s look at how to calculate the value of a pip.
The formula is simple: the value of a pip in the quoted currency is equal to the position size multiplied by the tick size.
Usually, the tick size is 0.0001, but there are currencies where the tick size is 0.01, for example, in pairs with the Japanese yen.
Let’s give some examples:
Direct Quote USD/JPY:
- Tick size: 0.01
- Position size: 1 standard lot (100,000 units of the base currency)
- Current USD/JPY rate: 78.20
- Value of a pip = 100,000 * 0.01 / 78.2 = 12.8 USD
Indirect Quote EUR/USD:
- Tick size: 0.0001
- Position size: 0.01 lot
- Value of a pip = 100,000 * 0.01 * 0.0001 = 0.1 USD
Cross – Rate AUD/CHF:
- Tick size: 0.0001
- Position size: 1 lot
- Current AUD/CHF rate: 1.02
- Current base currency pair AUD/USD rate: 1.05
- Value of a pip = position size * tick size * base currency pair quote / current pair quote
- Value of a pip = 100,000 * 0.0001 * 1.05 / 1.02 = 10.3 USD
These examples will help you understand how pips are calculated and how to calculate their value for different currency pairs.
An easier and quicker way to calculate pips is to use the calculator on the website. By selecting the program from the drop – down menu in the “Tools” -> “Calculators” section, the user can get the value of one or any selected number of pips by entering the lot size and selecting the name of the currency pair.
How to Calculate Pips Mentally?
This is easy to do by knowing a simple constant.
For pairs EURUSD, GBPUSD, NZDUSD, and AUDUSD, when the lot is 0.1, a 1 – pip movement in price costs $1.
Accordingly, when buying a full lot of 1.0, the minimum change in the exchange rate will cost the trader $10. When the lot is 0.01, it’s $0.1, and so on.
If the stop – loss is equal to one figure, or 100 pips, then when the trade protection is triggered with a 0.1 – lot position, the trader can lose $100, and with a 1 – lot position – $1000.
10 pips with a 0.05 – lot will cost 0.1 x 5 x 10 = $5
By the way, the leverage size chosen by the trader will not affect the amount of these losses in any way, only the size of the deposit margin for opening the position. Therefore, the mental calculation method described is universal.
Practical Tips and Nuances
Pips in MT4 – New Pips
Now, most brokers use five – digit quotes even in the MT4 terminals. Previously, five digits were only available for MT5 programs.
You can set the profit display in pips in MT4.
Click on the right – most column “Profit” of your trading terminal and in the drop – down menu, select the option “Profit”, then in the side list that appears – the line “Pips”.
Old Pips in Articles and Forums
Note that in most cases, especially on foreign forums, everything is indicated in “old pips”. No one ever means the fifth digit after the decimal point. Except perhaps beginners.
Working with Advisors and Indicators
When using advisors in the Forex market, pay attention to how the parameters related to pips are set. Robots often contain numerical values for stop – loss, take – profit, grid step, etc. All of them are measured in two – or three – digit “old pips”.
In new advisors, usually, no manual adjustment is required to work with 5 – digit dealing centers (DCs). You enter the values in old pips, and the advisor automatically adapts to the quotation system of your DC.
In old advisors designed for 4 – digit DCs, it may be necessary to add zeros to the parameters for correct operation in 5 – digit DCs. However, in modern advisors, this process is automated, and no additional settings are required.
Yen – related Pairs and Old Pips
When working with currency pairs that include the Japanese yen, pips are calculated considering two digits after the decimal point, not three. This is important for correctly understanding price changes in such types of quotes.
For example, the USDJPY quote is 146.438. In this example, when calculating pips, we ignore the third digit after the decimal point 146.438.
Using Myfxbook for Unusual Instruments
If you have doubts about how to calculate pips for little – known instruments such as Bitcoin, you can use the Myfxbook service.
Conclusion
In the Forex market, understanding and correctly calculating pips is a fundamental aspect of successful trading. Even experienced traders sometimes encounter confusion in defining pips and their values. This article provides simple explanations of the key points and concepts of pips.
Now, users know the difference between pips and pipettes, old and new pips, and can also find calculators to calculate profit or stop – loss in dollars for a selected trading lot size.
With this knowledge, traders can more confidently navigate the “mathematics” of the Forex market and understand the nuances of setting up advisors.