The worth of 1 pip in EUR USD

Many traders use pips as a measure to evaluate the performance in trading. If you have just started trading, it is important for you to read this short guide about the meaning of pip and what is the effect of 1 pip change in forex pairs.

Summary

• What 1 pip is in Forex trading
• Fractional pips
• How to use pips to compute incomes or losses
• Pips for traders, real example with Forex Lots
• Conclusions

What 1 pip is in Forex trading

PIP stands for “Price Interest Point” and is the last decimal place of a quote. It is mostly used in Forex trading and since Forex pairs usually have 4 decimal numbers, generally 1 pip is the change of 1 point at the 4th decimal of the currency pair; we could also define 1 pip as 1/100 of a cent.

Let’s suppose the EUR / USD exchange rate is set at 1.1745, if the price were to rise to 1.1746, then we could say that the price has increased by 1 pip for eur / usd.

Examples and terms:

EUR/USD = 1.17 (7 is the cent)

This is saying one euro equals 1 US dollar and 17 cents.

EUR/USD = 1.1745 (5 is the pip)

In this instance, the ‘5’ is the pip

Fractional pips

Some Forex brokers use fractional pips to take the exchange rate to an even more detailed price. A fractional pip is 1/10^th the value of a full pip.

EUR/USD = 1.17451 (1 is the fractional pip) 

How to use pips to compute incomes or losses

Since each currency has its own value, the value of a pip for a specific currency pair will be different from that of another cross.

It is known, for example, that:

• USD / JPY cross has a pip value equivalent to 0.01: multiplying 0.01 by the exchange rate therefore obtains the pip value
• EUR / USD cross, as for most other crosses, the pip value is equal to 0.0001 of the exchange rate.

Let’s try to compute how the change of 5 pips affects a capital of 10,000.00 € invested in US Dollars supposing the cross is 1.1745:

First of all you need to buy 10,000.00 € of US Dollars:

1.1745 x 10,000.00 € = 11,745.00 $

Then you need to compute the positive change of 5 pips in eur usd price, going from 1.1745 to 1.1750 as follows

11,745.00 $ / (1/1.1750) = ~9,995.74 €

In this example, an increase of 5 pips in eur usd exchange rate, reflects negatively on your starting capital in eur, because you purchased usd when eur was 5 pips weaker than now. It means that if you convert your money back to eur, you lose approximately 4.26 €.

Pips for traders, real example with Forex Lots

Now that you are confident with the right way to compute a pip, let’s understand what a lot is in Forex.

In fact, when dealing with a currency pair online, it is in the form of lots and not units. These lots are available in different denominations, generally from 100,000 units and with a minimum of 10,000.

As seen above, the fluctuation of the price of currencies between them is measured with the pip, which constitutes the smallest possible variation. To make significant gains it is therefore essential to multiply pips by large quantities.

Let's imagine that we apply a lot of 100,000 units to the EUR/USD trade whose exchange rate is 1.1750. The pip value will then be automatically changed. To do this, the following calculation is used:

(0.0001 / 1.1750) x 100,000 = $ 8.51 per pip.

It means that 1 pip change in eur usd pair with a lot of 100,000 $ affects your capital of 8.51 $.

If you don’t have the money to trade one lot you can buy less than 1 lot, such as 0.01 or 0.1 lots.
Every time you trade forex you will use leverage. Leverage permits you to have an exposure greater than the money you have. It increases the potential gains but also the potential losses, to know more about leverage check it out at the article what is leverage in forex

Conclusions

Pips are a standard way to compute earnings or losses in Forex Trading. They are widely used by traders and usually referred as a real measure of income. Traders do not say "I made 100 $", they say "I made 15 pips today". When a trader gains 1 pip in eur usd pair, he usually gets around 8.5 $. Hope this short guide helped you getting one step closer to become a profitable trader