What is a "PIP"

"PIP" is an acronym and stands for "Price Interest Point" or sometimes called "Point In Percentage". A PIP is the smallest increment of change for a particular currency pair. In currency pairs that are quoted out to four decimal places a pip is the last decimal place. For example the EUR/USD pair is quoted as 1.0968 so 1 pip is the last decimal place or in this case the 8. So it would take a change of 100 pips to move the pair 1 cent.

One exception to this rule is the Yen currency pairs. The Yen currency pairs are displayed out to two decimal places but one pip is still represented by the last decimal place. So for example USD/JPY pair is quoted as 123.79 the second decimal place is one pip or in this case the 9.
 

Pip Value - Not all pips are equal

The PIP value for each currency pair will vary depending on the closing exchange rate of that pair. The dollar value of each pip will also vary depending on the size of your trade. Assuming we are trading in USD Dollars then all pair where the USD is the quote currency then 1 pip will have the same relative value. On pairs where the USD is not the quote currency the PIP value will be variable.

We will use one mini lot for our example and the USD/CHF pair as an example of this. Let’s say we bought 1 mini lot of USD/CHF at an exchange rate of 0.9500 (Buying $10,000 USD/Selling $9,500 CHF) and then sold our USD/CHF pair at 0.9600 for a profit of 100 PIPs.

  1. To calculate our PIP value we first have to determine how many CHF (our quote currency) one pip represents based on our trade size. 
    • 10,000 x .0001 = 10 CHF per pip
  2. The we divide the quote currency (CHF in this case) by the closing price of the pair to get the US Dollar value per PIP
    • 10(CHF)/0.9600 = $1.0416 US Dollars per PIP
  3. Then we Multiply the PIPs Profit by our PIP value
    • 100 pips profit x $10.0416 = $104.16 Profit USD

Another example using EUR/USD. We will use one mini lot for our example and the EUR/USD pair as an example of this. Let’s say we bought 1 mini lot of EUR/USD at an exchange rate of 1.1000 (Buying 11,000 EUR / Selling 10,000 USD) and then sold our EUR/USD pair at 1.1100 for a profit of 100 PIPs.

  1. To calculate our PIP value we first have to determine how many USD (our quote currency) one pip represents based on our trade size. 
    • 10,000 x .0001 = 1 USD per pip
  2. The we divide the USD by the closing price of the pair to get the US Dollar value per PIP:
    • 1/1 = $1 US Dollars per PIP
  3. Then we Multiply the PIPs Profit by our PIP value
    • 100 pips profit x $1 = $100.00 USD Profit

So in simple terms on all pairs where the USD is the quote currency one pip is equal to $1 per each mini lot purchased.

When we calculate the cross pair PIP value we have to add an additional step:

In this example we will use EUR/GPB. We will use one mini lot for our example and the EUR/GBP pair as an example of this. Let’s say we bought 1 mini lot of EUR/GBP at an exchange rate of 0.7000 (Buying 10,000 EUR / Selling 7,000 GBP) and then sold our EUR/GBP pair at 0.7100 for a profit of 100 PIPs.

  1. To calculate our PIP value we first have to determine how many GBP (our quote currency) one pip represents based on our trade size. 
    • 10,000 x .0001 = 1 GBP per pip
  2. The we divide the GBP by the closing price of the pair to get the US Dollar value per PIP:
    • 1/1 = 1 GBP per PIP
  3. Next we have to calculate our US Dollar PIP Value by multiplying the exchange rate of our account currency (USD) by the GBP/USD exchange rate (currently @ 1.5628).
    • 1 GBP = 1.5628 USD so 1 PIP = $1.5628 USD
  4. 100 PIP x 1.5628 = $156.28 USD Profit
Michael Golembesky covers Forex, the S&P 500 and the VIX, contributing frequently to Avi's Market Alerts service at EWT while also hosting his own VIX Trade Alerts service and co-hosting the EWT Forex service. Learn more about Mike here and his services here.