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Pip Value

 

Pip value is the smallest increment in any Forex currency pair. For most currencies, the pip is 1/100 of 1 percent of the currency unit. Pips (Price Interest Point) are used to determine rate fluctuations and spreads.

 

To get the value of one pip in a currency pair, an investor must divide one pip in decimal form by the current exchange rate, and then increase it by the speculative amount of the trade. Currency is traded in lots. One standard lot of U.S. dollars is $100,000. The pip value is how much a change of one pip is worth for one lot. For the U.S. dollar, the pip value is 1/100 of 1 percent of $100,000, or $10. Each currency has its own pip value, depending on its pip and the size of the standard lot of currency.


The following factors influence the cost of the pip in the Forex market:

  • current exchange rate
  • transaction volume or size of the contract
  • type of currency pair

  • Example A:

    1 pip volume in EUR/USD is 0.0001

     

    Trading position volumeCalculation1 pip value
    100,000 EUR100,000 * 0.000110 USD
    10,000 EUR10,000 * 0.00011 USD
    1,000 EUR1,000 * 0.00010.1 USD
    100 EUR100 * 0.00010.01 USD

     

    Example B: 1 pip volume in USD/JPY is 0.01

     

    Trading position volumeCalculation1 pip value
    100,000 USD100,000 * 0.011000 JPY
    10,000 USD10,000 * 0.01100 JPY
    1,000 USD1,000 * 0.0110 JPY
    100 USD100 * 0.011 JPY

     

    From the example we see that a pip value (price) goes down, as the position (trade) volume decreases and is nominated in a second currency in a pair (Quoted Currency). The notion of pip value allows determining the economic value of the smallest possible rate change, in relation to the volume of a particular trading operation.

     

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