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Pip Value

Lesson 5: Pip and Pip Value

Pip is short for Price Interest Point, also called points. The most common increment of currencies is the pip. If the exchange rate goes from 1.2576 to 1.2577, that is ONE pip. In mathematical terms, a pip means the last decimal place of a quotation. In a down-to-earth way, the pip is how you calculate your profit or loss.

Example: 

For USD/JPY exchange rate at 120.75 a pip would be 0.01 (the second decimal place).

For EUR/USD exchange rate at 1.2385, a pip would be 0.0001 (the fourth decimal place). 

Each currency has it own value and the pip value is different from one another. It is important to know how to calculate the pip values.

Pip Value Formula:

Pip divided by the exchange rate = pip value

By now you are probably thinking "do I really have to work this hard myself? Can't someone do these calculations for me"? Good news is that nearly all FOREX brokers will provide you with this information automatically, however it is always a good thing to know how things really work.  So in case you don't want to waste your time calculating pip value yourself, click here to skip this part and move on to the next chapter. 

For those who decided to take a peek, let's go straight to examples before you get a major headache!  

First, let's consider examples where US Dollar appears first, meaning that US Dollar is the base currency.

Example 1: USD/JPY exchange rate at 120.75

STEP1: Figure out what is 1 pip.

There are two places therefore 1 pip would be 0.01 (second decimal place)

STEP2: Apply pip value formula to calculate pip value.

pip divided by the exchange rate = pip value

0.01 divided by 120.75 = 0.0000828

Example 2: USD/CHF exchange rate at 1.5230

STEP1: Figure out what is 1 pip.

There are four places therefore 1 pip would be 0.0001 (fourth decimal place)

STEP2: Apply pip value formula to calculate pip value.

0.0001 divided by 1.5230 = 0.0000648 

Example 3: USD/CAD exchange rate at 1.4590

STEP1: Figure out what is 1 pip.

There are four places therefore 1 pip would be 0.0001 (fourth decimal place)

STEP2: Apply pip value formula to calculate pip value.

0.0001 divided by 1.4590 = 0.0000685 

Now let's consider several examples where the US Dollar does NOT appear first, but you want to calculate US Dollar value anyway. An extra step includes a conversion from base currency value to quote currency value and the conversion formula is

base currency value x exchange rate = quote currency value

Example 4: EUR/USD exchange rate at 1.2301

STEP1: Figure out what is 1 pip.

There are four places therefore 1 pip would be 0.0001 (fourth decimal place) 

STEP2: Apply pip value formula to calculate pip value.

0.0001 divided by 1.2301 = EUR 0.0000812

STEP 3: Since EUR is the base currency in this example, we got EUR pip value, but we want to know US Dollar value. Therefore, we need to get back to US dollars. To do so, we use conversion formula

base currency value x exchange rate = quote currency value

0.0000812 x 1.2301 = USD 0.0000998 

Example 5: GBP/USD exchange rate at 1.7954

STEP 1: Figure out what is 1 pip.

There are four places therefore 1 pip would be 0.0001 (fourth decimal place)

STEP 2: Apply pip value formula to calculate pip value.

0.0001 divided by 1.7954 = GBP 0.0000556

STEP 3: Get back to US dollars using conversion formula

0.0000556 x 1.7954 = USD 0.0000998