What Are Forex Trading Pips

What Are Forex Trading Pips?

In the world of forex trading you'll often hear the term "pip", which is short for "price interest point". Sometimes people use the terms point and pip interchangeably --- they are the same thing. So what are forex trading pips?

A pip is actually the smallest fluctuation in the price of a specific currency.

Most major currency pairs are quoted to the fourth decimal place, which means the smallest change that can happen is the last decimal point.

For most major currencies, a pip is 0.0001. So if you were to buy USD/ CHF (U.S. dollar/Swiss franc) at 1.2476 and sell it at 1.2487, you would be up 11 pips.

Congratulations!

Here's how to calculate the value of 1 pip:

When USD is the base currency in a pair, simply divide 1 pip (usually 0.0001) by the exchange rate. So if the exchange rate for USD/CHF is 1.2488, divide 0.0001 by 1.1488 and you get a pip value of 0.000067204.

OK, I know what you're thinking: that's an awful small number! That's true, but you have to remember that forex trading depends largely on leverage. If, for example, your broker lets you trade with a leverage of 100:1, that means you can spend just $1,000 and actually buy a standard lot of $100,000. This, of course, affects the pip value. How?

Well, if you are only able to trade $1,000 in currency, the pip value in the above example would be calculated thus:

0.000067204 x 1000 = $0.07 per pip. So your 11 pip profit would bring you just $0.77. Wow, break out the champagne!

But if you leverage your trade so that you can actually use your $1,000 to buy $100,000 in currency, your profit goes up thus:

0.000067204 x 100,000 = $6.72 per pip

Now your 11 pips would bring you $73.92 profit. Now that's more like it!

So that's a simple explanation of what forex trading pips are, and how you use leverage to increase your profit per pip.

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