What is a Pip?
- The unit of measurement to express the change in value between two currencies is called a pip.
- A pip is the measure of the change in the exchange rate of a currency pair and corresponds to the fourth decimal digit in pairs like the EURUSD, and the second decimal digit in Japanese Yen-based pairs.
What is the value of a pip?
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.
For example, 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.