We discuss forex pips, calculating their value and how you can use this knowledge to help manage your risk as a trader.
If you have been trying to select a forex broker you’ve likely seen the word pip more than a few times.
So what is a forex pip? Well, a pip is an acronym for Percentage in Point and it is a unit of measurement for expressing changes in the value of a currency pair.
These days most brokers quote forex pairs to 5 decimal places, but in the past just 4 decimal places was common – a pip is the 4th decimal place in your currency pair quote, whilst a point is the 5th.
For a pair like USDJPY which is generally quoted to just 3 decimal places, the second decimal is the pip and the third is the point.
Pips are necessary due to the amount of leverage used in the forex market, a seemingly small number of pips can be worth quite a lot of money once levered.
What is a Pip in Forex and How Much is 1 Pip Worth?
Forex Pip Example
Let’s look at an example of a forex pip on the EURUSD pair:
- EURUSD is trading at 1.11560
- It rises by one pip to 1.11570
- It falls by six pips to 1.11510
On the USDJPY pair:
- USDJPY is trading at 105.650
- It rises by one pip to 105.660
- It falls by six pips to 105.590
What is a Point?
A point is simply one 10th of a pip – the 5th decimal place on most currency pairs or the third on USDJPY etc.
If EURUSD is trading at 1.11566 and falls by 6 points, it will be trading at 1.11560
If USDJPY is trading at 105.566 and falls 6 points, it will be trading at 105.560
Even if a forex broker’s spread is just a few points, they will usually express this in pip form ie a 6 point spread will be expressed as 0.6 pips.
How Much is a Pip Worth in Forex?
It’s important to understand how much a pip is worth in forex so you can decide your trade size and manage your risk effectively.
To keep things simple we will assume your account is denominated in US Dollars. If your account is denominated in another currency like ZAR however, you may want to get a free pip value indicator from the MT4 market, as this will make things a lot easier for you.
USD as Quote Currency – EURUSD, AUDUSD, GBPUSD etc
Forex pairs featuring the US Dollar are the most liquidly traded currency pairs and tend to have the tightest spreads.
The majority of pairs in this category are quoted against the USD dollar, that is the USD is the second currency in the pair eg EURUSD, AUDUSD, GBPUSD etc
If your account is denominated in US Dollars, calculating the value of a pip for one of these pairs is very easy, as 1 pip on 1.00 size trade will always be worth $10, so if you are trading 0.5 size, a pip will be worth $5 and if you are trading 0.1 size, a pip will be worth $1.
Note that this actually works for different currency pairs depending on what your account currency is eg if your account is denominated in AUD and you trade EURAUD with size 1.00, a pip will be worth $10 AUD, or if your account is denominated in ZAR and you trade USDZAR with size 1.00, a pip will be worth 10 ZAR.
USD as Base Currency – USDCAD, USDZAR etc
Not all currency pairs are quoted with the US Dollar second, some like USDCAD or USDZAR, the US Dollar is the base currency.
Calculating the value of a pip for one of these pairs is still pretty straightforward. A pip is still worth 10 units of the quote currency at 1.00 trade size, or 1 unit of the quote currency at 0.1 trade size.
For example, the value of a pip on USDCAD at 1.00 trade size will be worth 10 CAD.
Then you just need to divide this by the current exchange rate to get the value in USD.
Again for example, if USDCAD is trading at 1.1, you would divide the 10 CAD by 1.1 to get the USD pip value of $9.09.
Exotics and Currency Crosses
Calculating exotics and crosses follow a similar process.
For example, if you’re account is denominated in USD and you are trading EURAUD at size 1.00, a pip would be worth 10 AUD, you’d then need to multiply that 10 by the current AUDUSD exchange rate to get the USD value.
This is because AUDUSD is quoted in US Dollars.
If however, you were trading EURCAD, you would have to divide the 10 by the USDCAD exchange rate as USDCAD is quoted in CAD.
Calculating Your Risk and Trade Size
Once you know the value of a pip, it’s very easy to calculate your risk and trade size.
- You want to place a trade on EURUSD with a 10 pip stop
- You know a pip on this pair is worth 10 USD at trade size of 1.00
- The risk on this trade would be $100 (10 pips x 10 USD)
- As you only want to risk 50 USD on your trade, you reduce your trade size to 0.5
It’s always important to understand how things work such as what is a pip and how much is 1 pip worth. But once you have this knowledge, there’s no harm taking a shortcut or two!
If you just want to get right into trading rather than calculating pip values, there are some great free indicators available from within your Blackstone Futures MT4 platform.
By clicking the market tab within your trading platform, you’ll be able to find indicators that tell you exactly how much a pip is worth, no matter your account currency or forex pair.
Ultimately this knowledge allows you to quickly calculate your risk and enter trades on the fly.