What is a pip in forex trading?

What are pips in forex trading?

Pips in forex trading represent a one-digit movement that’s seen in the fourth decimal place of a FX pair’s price. Pip is short for ‘point in percentage’. For instance, when trading EUR/USD and your open position moves from $1.23456 to $1.23466, that’s a one pip movement.

In the example, the 5 that later increases to 6 is where the one-pip movement is seen. Note that the above doesn’t apply when trading forex for cross currencies like the Japanese yen, where a pip movement is seen on the second decimal place.

A ‘baby pip’ or pipette is observed on the fifth decimal place, which is the final 6 in the example.

What is the difference between a pip and pipette?

The difference between a pip and pipette is the decimal places in the quote. The pip is a one-digit movement of the fourth decimal place. On the other hand, the pipette, also known as the ‘baby pip’, is seen with the change on the last decimal place.

How to calculate pips in forex trading

The exact value of the pip will be determined by several factors. These include the forex pair you’re trading, the exchange rate between the two currencies and the lot size or monetary value of your trade.

To calculate pips in forex trading you multiply a hundredth (1/100) of one percent (1%) or basis point, which equates to 0.0001 for one pip as seen in the equation below:

How to calculate forex pips in CFDs

To calculate pips when trading forex CFDs with us, you’ll multiply one pip (0.0001) by the lot size you’ll be trading. For example, if you’re trading a standard lot size of £100,000 (base currency) units per CFD contract for GBP/USD, one pip movement will be valued at $10 (£100,000 x 0.0001 per pip = $10).

Continuing with the same GBP/USD pair as in the previous example, the value of a pip movement for a mini lot size of £10,000 (base currency) units per CFD is equivalent to $1 (£10,000 x 0.0001 per pip = $1).

How to calculate forex pips in spread bets

To calculate forex pips when trading using spread bets, you’ll need to know the amount you’re betting per point of movement. This is because spread bets use the amount of money you’ve bet per movement point in a forex pair.

Example of calculating pips in forex trading

When you open a position on GBP/USD and open a quote at $1.28960, a pip movement will be observed on the fourth decimal point seen as the 6. An increase in one pip would result in the quote increasing to $1.28970. This means the quote currency is weaker in relation to the base currency, resulting in more US dollars needed to buy one British pound.

On the other hand, when trading USD/JPY, the quote will only have two decimal places. The second decimal place will show the change in the pip movement. For example, for a quote of ¥123.45, a one-pip decrease would indicate that the Japanese yen was strong against the US dollar, meaning less JPY would be required to buy one USD.

How to trade forex with us

1. Decide if you’ll be trading forex using spread bets or CFDs
2. Create a live trading account or practise using a demo account
3. Choose the forex pair you want to trade
4. Open your position
5. Monitor your open position

With us, you can trade forex on the spot via options or using forwards. You can also use spread bets or CFDs. Note that we only offer forex forwards with spread bets. This will enable you to speculate on the rise and fall of spot forex, options and forwards.

When trading spot forex, you’ll do this at the current market price – there are no fixed expiries. With forex forwards, you can trade currency pairs at a set price and specified future or expiry date.

Forex options give you the right, but not the obligation, to buy or sell a currency pair at a set price, if it moves beyond that price within a set timeframe.

Spread bets, CFDs and options are derivative products that use leverage to increase your exposure to the underlying asset you’re trading. Leverage will amplify the profit and loss you make on your trade, depending on whether the market moves in your favour or against you. Ensure that you manage your risk carefully and trade within your financial means.

Also note that the forex market is volatile, which can cause the currency pair you’re trading to experience a rapid price movement within a short timeframe. Ensure you do your technical and fundamental analysis before you open a position.

If you’re not comfortable with trading yet, make use of our free resources on IG Academy to upskill yourself. You can also open a demo account to practise using virtual funds worth £10,000.