PIP Definition and Examples
A Percentage in Point, usually called a ‘PIP’ in trading, represents the price movement in a currency exchange rate. A PIP is a very small measure of change in a given currency pair, and is measured and presented as a quote.
Most currencies are quoted to the 4th number after the decimal point, and a PIP represents the last of those numbers. Therefore 1 PIP = 0.0001 of a currency. In an exception to the rule, all Forex pairs containing JPY are only quoted to the second decimal number. So in USD/JPY, 1 PIP = 0.01 of the given currency.
Why are PIPs Important?
Even though PIPs represent a very small movement in price, a slight change can result in large price swings when trading Forex with high-leverage. Since PIPs are small in value, Forex is traded using micro lots, mini lots or lots, representing 1,000, 10,000 or 100,000 units of the currency being traded respectively.
There are three things that determine the value of a PIP:
- The currency pair being traded
- The size of the trade
- The exchange rate of the currency pair
For example: GBP/USD
If the current market price of GDP/USD is 1.30000 and you have opened a micro lot trade with 1000 units of the currency, the value of one PIP will be calculated as follows:
(1 PIP/exchange rate) x lot = PIP value
(0.0001/1.30000) x 1000 = 0.0769
Therefore, for each movement of 1 PIP, the trader would earn or lose 0.0769 Pounds.
Fractional PIP Pricing
To make price quotes more accurate, LonghornFX also includes a 5th decimal place in Forex currency pair prices. This is called a ‘Fractional PIP Price’, which is valued at 0.00001 of the quoted currency. Fractional PIPs are used to provide traders with more precise quotes for price fluctuations.