What is a Pip?

In case of forex trading eventually it’s the pips that count. A pip stands for the smallest possible price difference in an exchange rate. The value of a pip is important for the determination of among other things the risk/ratio yield of a trade, but of course also for the calculation of profits and losses.

Like indicated before, the price of a currency pair is being reproduced by means of a number with four digits behind the comma. The only exception to this rule occurs when the JPY happens to be the counter currency of a currency pair.

  • The smallest possible price difference in case of all currency pairs consequently amounts to 0,0001, or in other words to 1/10.000.
  • When the JPY is the counter currency of a currency pair, the smallest possible price difference consequently amounts to 0,01, or in other words to 1/100.

Example 1:

The price of EUR/USD is indexed at 1,2350. Suppose this price is going to rise up to 1,2375. In that case the price difference will amount to 0,0025, or in other words to 25 pips.

Example 2:

The price of GPB/USD is indexed at 1,4425 and you expect that the price is going to drop to 1.4375. So you are going short GPB. How many pips are you going to earn if the price indeed reaches 1,4375?

In total the price is going to drop with 0,0050, or in other words with an amount equal to 50 pips.

Example 3:

USD/JPY is indexed at 92,9 and you expect that the USD is going to show a sharp rise compared with the JPY. So you’re going long USD and you decide to step out at 93,30. How many pips did you earn?

In this case JPY is the counter currency, so the smallest possible price difference amounts to 0,01 instead of 0,0001. The price difference amounts to 0,40, or in other words to 40 pips.

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