What is a PIP in trading and in Forex? Beginner’s Guide

All humans ask ourselves the same questions: Who are we? Where we come from? Y

What is a PIP?

Well, maybe you haven’t wondered who you are because you’ve known each other since you were born, but if you’re a trader you’ve come across PIPs, and today we’re going to tell you what they are about. And be careful, because this tool will help us operate with greater security and become FOREX black belts. Let’s start!

Where does the word PIP come from?

The term Pip comes from the English “point in percentage” or percentage point. It is a measure of the smallest movement of the exchange rate in currencies. It is a standardized unit and is the quantity smaller according to which the price of a currency can vary.

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Although a PIP was effectively the smallest increment in which the price of a currency pair moved, the advent of more precise methods of pricing invalidates this definition.

If you meet him on the street

How would you recognize a PIP?

The PIP is found in the number that is located furthest to the right of any currency quote. For example: If the Euro Dollar EUR/USD currency pair price was at 1.4000 and moved to 1.4023, we would say that the price moved 23 pips.

And here’s the kicker, these units help us protect us of the losses that a larger variation would cause. In the event that the minimum point of variation was equal to 10 PIPs, a change of one point would cause a higher volatility in currency exchange rates and therefore an increase in risk. And none of us want that! To this day, the PIP continues to be a standard value for all traders, so it is very useful as a measure to always communicate on the same terms without confusion. It is for all this that FOREX trading has become a super star in recent years.

Yes, yes, but…

How much is a pip worth in Forex?

The value of a Forex pip is related to the size of the open contract in the foreign exchange market. The common thing is that the value of a pip in Forex tells us the value of a pip for the contract of a lot standard with a face value of 100,000. And for most currency pairs, a PIP is a movement in the fourth decimal place except the pairs that use the Japanese yen (and in this case the second decimal would be used)pip table.jpg

What can we do to calculate the PIP?

Well, we have two ways:

-The first is called currency price and is obtained by multiplying the amount to invest by the value of the PIP.

-The second form is called base currency with which the result of the base currency is divided by the exchange rate found in the market when performing our operation.

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