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What is Pip in Forex?
WikiFX | 2021-12-28 11:01:31
At this point, let’s do some math, just a little bit.
You may have heard of pips , “points” , “pipettes”, and “lots” in town, so now we will explain them and show you how to calculate their value.
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Follow this message carefully because it is useful for all other forex traders.
Do not rush to start a business until you are satisfied with the value of the Pip and the profit margins.
Who is Pip?
The standard used to calculate the exchange rate between two currencies is called “Pip”.
If EUR / USD moves from 1.1050 to 1.1051, that extra .0001 USD in value is equivalent to ONE PIP .
Pip is usually the last number that comes after the drop in the price of a foreign currency.
Most exchange rates are calculated at up to 4 points, but with the exception of some groups such as the Japanese yen (which are calculated at only two points).
For example, for all EUR / USD, their calculation is 0.0001 , and for all USD / JPY, their calculation is 0.01 .
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What is Pipette?
These are brokers who value the currency of the country more than the original “4 and 2” to “5 and 3”.
They are agents of FICTIONAL PIPS , called “points” or “pipettes.”
If the information about “pip” does not confuse a new forex trader, then let us shed some light on the fact that “point” or “pipette” or “fractional pip” is the same as “one tenth of a pip” .
For example, if GBP / USD moves from 1.30542 to 1.30543, this .00001 USD extra is called PIPETTE
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Here is a description of how Fractional pips are on the buying and selling schedule.
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In the buying and selling table, the number representing one-tenth of the pip almost always appears on the right side of the two-digit large number.
This is a “map” pip that will help you to learn pips…
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How to calculate the value of Pipk
As each national currency has its own value, it is necessary to calculate the value of the pip in proportion to the value of that currency.
In the following examples we will use the 4 point scale to value money.
To deal with the situation, the exchange rate will be as follows. (EUR / USD at 1.2500 price will be listed as “1 EUR / 1.2500 USD”)
EXAMPLE # 1: USD / CAD = 1.0200
It will be read as 1 USD equivalent to 1.0200 CAD (or 1 USD / 1.0200 CAD)
(exchange rate of foreign currency) times the exchange rate = pip value (in local currency)
[.0001 CAD] x [1 USD / 1.0200 CAD
Or simply:
[(.0001 CAD) / (1.0200 CAD)] x 1 USD = 0.00009804 USD for every single pill traded.
Looking at this simple calculation, if we trade USD / CAD for 10,000 units, then one pip will change the value to about 0.98 USD (10,000 units x 0.00009804 USD / unit).
We say “estimate” because as the exchange rate fluctuates, so does the value of each pipet.
EXAMPLE # 2: GBP / JPY = 123.00
Here is another example where a foreign currency is used with the Japanese Yen as the original national currency.
Note that in this currency pair only 2 drops are used to measure the value of 1 pip (most currencies use only 4 drops). In such a case, the conversion of pip 1 would be .01 JPY.
(exchange rate of foreign currency) times the exchange rate = pip value (in local currency)
[.01 JPY] x [1 GBP / 123.00 JPY]
Or simply:
[(.01 JPY) / (123.00 JPY)] x 1 GBP = 0.0000813 GBP
So, every time we trade 10,000 GBP / JPY, the price change of the pip is about 0.813 GBP.
How To Recover Pip Value By Using Money In Your Trading Account.
The last question when determining the value of pip corresponding to your pocket is, “What is the value of pip in the currency used in my Trading Account?”
Since this is the case in the world market, not everyone has the same national currency account .
This means that the value of a pip is calculated in proportion to the value of the money a person’s account deals with.
This list is probably the simplest; simplify: “the value of the pip you have found” Calculate it by the exchange rate of your account, and the amount of money you will trade.
If the “value of the pip you find” is the same as the national currency in the exchange rate:
Using the previous example of GBP / JPY, let us convert the detected value of pip of .813 GBP to the value of pip in USD exchange rate and GBP / USD 1.5590 as our exchange rate.
If the currency we are exchanging is different from the national currency in terms of exchange rate, all we have to do is; We will categorize the “value of the pip you find” by our exchange rate:
.813 GBP for all pip one / (1 GBP / 1.5590 USD)
Or
[(.813 GBP) / (1 GBP)] x (1.5590 USD) = 1.2674 USD for every single pip change.
So, for every .01 pip change in GBP / JPY, the value of each one in the 10,000 kits will change by about 1.27 USD.
If the currency we are exchanging is the same as the national currency in terms of exchange rate, then we say, “the value of the pip you found” times the exchange rate of the original currency.
Using the previous USD / CAD example, we want to determine the value of the pip .98 USD in New Zealand Dollars. We will use .7900 as our exchange rate:
0.98 USD per pip X (1 NZD / .7900 USD)
Or
[(0.98 USD) / (.7900 USD)] x (1 NZD) = 1.2405 NZD for each change in pip
For every move of .0001 pip in USD / CAD from our previous example, each one in the 10,000 has changed in value by about 1.24 NZD.
Even though you have mastered the art – at least the pip value calculation – maybe you are just as fast as you can think, “So I’m going to do this long calculation on my own every time I run a pip?”
Well, the answer is a resounding no. Almost all forex brokers do the calculations directly, but it is useful if you know the trade-offs.
And if your broker doesn’t do the billing, no worries! You can use our Pip Value Calculator! Aren’t we entertaining you ?!
In the next lesson, we will explain how these seemingly insignificant financiers are cheating.
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