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Pip in Trading: what it is, how it works and tips
When you are in the trading world, it is important to know the price variations in order to get the profits you require. There are some important terms that you need to have in your dictionary, such as Pip.
Pip is used in cryptocurrency trading, forex, currencies and stocks. Below we are going to tell you all about Pip in Trading. Learn what it is, how it works and of course examples so you know how it is calculated.
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What is a pip?
A pip, short for "percentage point", is a unit of measurement used in the financial market to indicate the smallest change in the price of a currency pair.
In simple terms, the pip represents the fourth decimal place in most currency pairs, except for pairs involving the Japanese yen, where the pip is the second decimal place.
Pips play an important role in calculating profit and loss in the foreign exchange market. They also help investors assess the volatility of a currency pair, facilitating risk management during trading.
In summary, the pip is a fundamental unit in the foreign exchange market that represents the smallest price change in a currency pair, and is essential for traders to understand and analyze currency market fluctuations.
How is the pip value calculated?
To calculate the pip value for a given position, you can use a pip calculator and enter the number of units in the field "Trade size".
If you know the pip value, you can also calculate the amount of commission for each position by following the formula below:
- For instruments whose price is expressed to 4 decimal places: units X 0.0001 X conversion rate to USD = pip value.
- For instruments whose price is expressed to 3 decimal places: units X 0.001 X conversion rate to USD = pip value
- For instruments priced to 2 decimal places: units X 0.01 X conversion rate to USD = pip value
- For instruments priced to 1 decimal place: Units X 0.1 X conversion rate to USD = pip value
These formulas help you determine the pip value based on the number of units traded and the USD conversion rate. This method is useful for accurately calculating the pip value and the commission associated with each trading position.
We are now going to show you a couple of examples of Pip calculation, so that you can apply it today:
Example 1
For currency pairs where USD is the quote currency (such as BTC/USD, EUR/USD, GBP/USD, USD/JPY, etc.):
For pairs with four decimal places (except pairs with JPY), one pip is the change in the fourth decimal place. For example, if EUR/USD goes from 1.3000 to 1.3001, the change is 1 pip.
To calculate the monetary value of a pip, you can use the following formula:
Pip value = (0.0001 / Exchange rate) * Lot size.
Example 2
For currency pairs where JPY is the quote currency (such as USD/JPY, EUR/JPY, etc.):
For pairs with two decimal places, a pip is the change in the second decimal place. For example, if USD/JPY goes from 110.50 to 110.51, the change is 1 pip.
For these pairs, the calculation of the pip value is slightly different:** ** For these pairs, the calculation of the pip value is slightly different:** > Pip value = (0.0.50)
Pip value = (0.01 / Exchange rate) * Lot size
It is important to remember that the lot size also influences the pip value. In general, a standard lot is 100,000 units of the base currency, a mini lot is 10,000 units and a micro lot is 1,000 units.
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What are the pips of the major currencies?
The pips vary for each currency due to the exchange rate of the pairs at that time. The major currencies traded in the foreign exchange market are the US Dollar (USD), Euro (EUR), British Pound (GBP), Japanese Yen and Canadian Dollar (CAD).
These major currencies can be combined with each other or with other currencies with lower trading volume in the foreign exchange market, known as exotic currencies.
The pip variation in exchange rates is the determining factor for the positive or negative outcome of a currency trade, as well as for quantifying the profit or loss of the trade.
The greater this variation, the more volatile the currency pair is, and therefore the easier it is to make a profit when trading it. However, the risk of loss will also be greater.
The average price movements of major currency pairs in pips per trading session can vary depending on the volatility of the market. Below is a hypothetical example of these average price movements in pips per trading session for some of the major currency pairs:
- EUR/USD (Euro vs. US Dollar): 1 pip = 0.0001.
- USD/JPY (US Dollar vs. Japanese Yen): 1 pip = 0.01
- BTC/USD (US Dollar vs. Bitcoin): 1 pip = 0.01
- ETH/USD (US Dollar against Ethereum): 1 pip = 0.01
- GBP/USD (British Pound against the US Dollar): 1 pip = 0.0001
- USD/CHF (US dollar vs. Swiss franc): 1 pip = 0.0001
- AUD/USD (Australian dollar vs. US dollar): 1 pip = 0.0001
- USD/CAD (U.S. dollar vs. Canadian dollar): 1 pip = 0.0001
- NZD/USD (New Zealand Dollar vs. US Dollar): 1 pip = 0.0001
These figures are hypothetical examples only and may vary depending on market activity, economic and geopolitical events, among other factors. It is essential to monitor volatility and market movements when trading currency pairs in order to make informed decisions and establish effective trading strategies.
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