What Is PIP in Forex Trading?
When trading in the forex market, you need to have a close eye on two currencies at the same time. PIPs are essential in forex as they tell the traders about the size of profits or losses that can be made from a particular currency pair. All forex currencies are quoted as PIPs, and each movement in the currency exchange rate defines how much traders have to pay and how much profits they can make. Let's take a look at everything you need to know about the Percentage In Point (PIP).
What is PIP?
A Percentage in Point, also known as PIP, is the unit of change for the currency pair's exchange rate in a forex market. In other words, it is the smallest price move that a currency exchange rate can make. PIP’s value is calculated by dividing 0.0001 by the exchange rate. A PIP is usually $0.0001 for all the currency pairs related to the US dollar. This is also known as one basis point that is calculated as 1/100th of 1%. For example, if the USD/EUR currency pair is quoted as 100 with one PIP, the value of the PIP will be 1/100 ÷ 100 = $0.0001. Similarly, with a greater PIP of 15 basis points, a single PIP change will cause greater volatility in the currency values when compared to a PIP with only one basis point. The lower the PIP, the less risky currency trading becomes.
How does PIP work?
Since all exchange rate movements are measured by PIPs, the smallest change for most of the currency pairs is always 1 PIP. To convert the value of one PIP to a currency like the US Dollars, the value of PIP has to be multiplied by the exchange rate to ascertain the extent of profits or losses. For example, let's assume you wish to buy a CAD/USD pair at an exchange rate of 1, implying that you will be purchasing the Canadian Dollars and selling the US Dollars simultaneously. Now, if you close the trade at 0.7, you will make a loss by 3 PIPs, and if you close the trade at 1.05, you will profit by 5 PIPs. Take trading a mini lot for example, 0.1 on a currency pair. If you were to sell EURUSD at 1.1215 with 0.1 lots, that is the equivalent of 10,000 EUR in notional value. Your P&L will be 1 USD per pip movement (as USD is the TERM currency in this instance). So if the EURUSD were to move down to 1.1210, you would have made a profit of 5 USD
Top factors that affect PIP
Leverage is when you borrow funds from your broker to increase your trading exposure and position beyond your available cash balance. The more leveraged your position is, the riskier it is. Combining a highly leveraged position with PIPs can lead to a huge decrease in your investment value even when the PIP falls by a few points only. This is because the higher your transaction value, the higher is the value of the PIPs which can wipe out the investment sooner than expected.
The volume of trade refers to the number of currency pairs traded in the forex market in a particular time period. It affects the forex PIP values directly, implying that the larger the trade volume, the larger will be the profit earned through PIPs. If the market moves 50 PIPs in your favour with a lot of 100,000 units, the PIP forex value per unit would be 100,000*0.0001 = $10. 50 PIPs in dollars would reap traders a profit of 50 PIPs*$10 = $500. On the other hand, if the value of the trade is less, supposedly 10000 units only, the value of PIP per unit will also be extremely low = 10000*0.0001 = $1.
3. Type of currency pair
Since all currency pair movements are measured by PIPs, the forex PIP value of a single PIP will always be different for different currency pairs. This is because the exchange rates of each currency pair differ as well.
How to calculate PIP in forex
The value of each PIP depends on the currency pair being traded, the size of that trade and the prevailing exchange rate. Here is a stepwise guide on how to calculate PIP – Step 1: Determine your PIP size. Since most currencies are quoted up to 4 decimal places, it is 0.0001 for most of the currencies except for the ones that contain the Japanese Yen. Since the Japanese Yen is relatively lower in value, it is mostly 0.01 for the same. Step 2: Determine the exchange rate of the currency pair. Step 3: Use the PIP value formula for calculating the forex PIPs value for a position – Currency PIP value = (PIP size/exchange rate) * position size Step 4: Convert the PIP value that you get into your country’s currency by using the current exchange rate. Let us assume that we have a currency pair of CAD/USD, with a direct quote of 0.7747. This means that for 1 Canadian dollar, a trader can buy around 0.7747 US dollars. Now let us consider that there was a PIP increase of 1-PIP, increasing the quote to 0.7748. The value of the Canadian dollar would then rise relatively, as now 1 CAD enables the trader to buy more dollars (0.7748) than before.
How to calculate forex price moves with PIP
The size of the trades directly affects how much you can gain or lose through PIPs. Larger positions have more exposure to monetary gains and losses. You can calculate forex price moves with this formula = Positions size * 0.0001 = PIP’s monetary value So, if you open a position with 100,000 PIPs, the value per pip would be 100,000*0.0001 = $10 per PIP. Each buy position when markets move in your favour will earn you $10 on each unit, and the same will happen when you open a sell position when the exchange rate is higher than what you purchased it at. However, if the markets are moving against you and you open a buy or sell position, you will lose $10 per unit as a per PIP movement. Similarly, if the trade size falls to 5,000 units, the value of each PIP will be $0.5; if the trade size increases to 50,000, the value of each PIP will be $5, and if the trade size is as big as 1,000,000, the value of each PIP will be 1,000,000*0.0001 = $100.
Calculating profit and losses with PIP
Both profits and losses can be calculated by multiplying the PIP value with the total trading lot. The higher the lot, the higher the investment and the higher the risk or return. Let us understand this with an example.
How to calculate profits with PIP
For example, you open a position of USD/EUR with 500,000 units. The position closes at 1.5 with a 50 PIPs (in dollars) profit on the trade. the total profit on the position can be calculated by first calculating the value of each PIP price as understood above – PIP value = (0.0001/1.5)*500,000 = 33.34 USD Total profit = 50 PIPs * 33.34 USD = $1666.67
How to calculate losses with PIP
For example, you open a position of USD/EUR with the same 500,000 units. The position now closes at 1 with a loss of 70 PIPs in total. PIP value = (0.0001/1)*500,000 = 50 USD Total loss = 70 PIPs * 50 = $3500
Converting PIP value based on currencies
PIP value can be converted on the basis of which currency you are trading. Different rules apply to different currencies. If you are trading in the UK and your account trades in GBP, you need to convert the value of PIP into pounds. This can be done by converting the current value of PIP that you calculated by the GBP/USD exchange rate.
The only exception: USD/JPY
The currency pair USD/JPY is the only exception when it comes to calculating PIPs in forex. Whenever any major currency is traded against the Japanese currency, pips are not the fourth decimal in the calculation but the second decimal. This is due to the extremely low value of the Yen when compared to other major currencies. For example, if you are trading USD/JPY in a lot of 10,000 units, one PIP movement or value of 1 PIP in JPY will be equal to 0.01 Yen per unit, or 100 Yen in total for the lot.
Top Forex PIP trading strategies
1. 50 PIPs a day
In 50 PIPs a day forex trading strategy, traders open and close several positions in one day instead of investing money for the long term. This is suitable for day traders as they invest money with the purpose of making short term profits regularly. This strategy helps in capturing at least 50 percent of the price range in which the forex currency pairs move in one trading day.
You need to keep a close eye on the chart as soon as a candlestick closes in a particular time period during a day. Once it closes, you can place one buy pending order and one sell pending order, with a buy stop order that is 2 PIPs above the high price point and sell stop order that is 2 PIPs below the low price point, to ensure that you make profits irrespective of the markets falling or rising. Either of the two pending orders will be executed as the currency pair price will fluctuate, and this is where you can cancel the opposing order and benefit from the fluctuating price range.
- Take profit order can be placed at a target of 50 PIPs
- Risk managing stop-loss order can be placed around 10 PIPs above the high price or below the low price
If your profit target is hit, your deal for the day is done. However, if the currency pair price does not hit your profit target, you should exit the trade before the trading day ends by moving to your stop loss or break-even point. Each successful trade in this strategy will guarantee you a profit of at least 50 PIPs that will be equal to $0.005, which for a trading lot size of 100,000 adds up to $500.
2. 30 PIPs a day
In 30 PIPs a day forex trading strategy, you can profit from the volatile currency pairs in the market like GBP/JPY, AUD/JPY, GBP/AUD, GBP/NZD and more. The 5-minute time frame is the best suited in this strategy as it provides clear reversal points in the market when needed. The 30 PIPs a day strategy is based on the 10-period Exponential Moving Average (EMA) and the 26-period EMA. When the 10-period EMA crosses the 26-period EMA, it indicates an entry signal by providing you with the market’s trading direction. The currency pair price slowly starts following the direction that the EMAs indicate to confirm the market sentiment. A position can be opened at a high price point or low price point as soon as the market retraces as a short-term correction and you decide to catch the price range that can potentially profit post-correction. This strategy is traded only at retracement levels because the market direction corrects itself to confirm the trend that gives maximum success in trades.
- A sell position can be opened during a downtrend when the 10-period EMA crosses the 26-period EMA from above and continues decreasing
- A buy position can be opened during an uptrend when the 10-period EMA crosses the 26-period EMA from below and continues increasing
- Stop-loss can be placed around 20 PIPs above the sell level
- Take profit can be placed around 40 PIPs above the sell level
Calculate PIPs for each trade size today to calculate gains
PIPs are essential in the forex market as they help you calculate the total profit you earn on a particular lot size in the trading market. Start forex trading with Blueberry Markets to access tight spreads, super fast trading environment, and quick withdrawals.
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