In forex trading, a "pip" stands for "percentage in point" or "price interest point." It is a standard unit of movement in the exchange rate of a currency pair, representing the smallest price change that can occur in the exchange rate of two currencies. Typically, most currency pairs are quoted with four decimal places, and a pip is the last decimal place.
Pip value calculation
The formula for calculating how much 1 pip is worth, per 100 000 units (or 1 lot) of the base currency, is Amount of Base Currency x Pips = Amount in Quote Currency.
Pip Value = Exchange Rate/ Pip Location × Lot Size
For example, in EURUSD, the applied formula would look like this: 1 lot (€100,000) X 0.0001 = $10.
For Yen-based currency pairs, the result is a little different because the pip’s position is different. The value of 1 pip in USDJPY is 1 lot ($100,000) X 0.01 = ¥1000.
Let’s look at a practical example:
A trader buys 1.5 lots of GBPUSD at 1.3030 and the price rises to 1.3043. This is an increase of 13 pips. The trader decides to close the position. The formula, in this case, would be: 1.5 lots (£150,000) X 0.0013 = $195 profit.