When mastering new practices and skills, we come across basic concepts that are essential for getting a full picture. The same is true about the Forex glossary* which helps beginners start their journey in trading. The notion of a pip is one of such fundamental terms which is often used in professional forex books.

Today we will explain why it is important to understand pips and know how to calculate them when trading on Forex.

*Glossary is a list of terms in a particular domain of knowledge with explanations and examples.

What is a pip?

A pip is the smallest change in the price of a particular currency pair or other instruments. In everyday forex trading, they are used to calculate profits or losses. A pip is a minimum amount by which the asset price can change. So, its value is determined by the decimal figures in the quotes provided by brokerage firms. Some brokers offer 4-digit quotes where the smallest price change is 1 pip, or 0.0001. Other companies offer 5 decimal places in a quote. They are considered to be more accurate. Due to these differences, traders have to specify each time what is meant by a pip.

The word “pip” has acquired many synonyms and slang terms. You can also come across such a concept as “point.” The meaning is still the same, though.

How to calculate pips and why?

The skill of calculating pips allows traders to protect their funds from a serious drawdown. This is the basic principle of risk management* which is the process of assessing possible losses and profits. If traders know the value of one pip, they can easily evaluate what a trade can bring them.

While it was easy to answer why we need to know pips, it is a bit more complicated to figure out how to calculate them.

The difficulty lies in the fact that there are three types of asset quotes on Forex, and each of them has a different way of calculation:

  1. A direct quote is when the US dollar comes first in the pair (USD/JPY). The pip value is calculated by multiplying one point by the trade size and then dividing it by the current exchange rate.
  2. An indirect quote is when another currency comes first in the pair (EUR/USD). In this case, the pip value does not depend on the current exchange rate and is calculated by multiplying one point by the trade size.
  3. A cross rate is when there is no US dollar in the pair (GBP/JPY). Here, the calculation of the pip value comes in two stages: first, the pip value is defined in the base currency and then in US dollars.

Luckily for traders, there is no need to know these formulas by heart. A caring broker with access to the MetaTrader 4 platform will make this process much easier for you. For example, with the InstaForex MT4 platform, you will automatically get the calculation of the pip value right after a new order is placed. The result will instantly appear in the chart field.

Alternative way to calculate pips

Most probably, many of you know how to calculate pips on NAS100 and US30. There is also an alternative way to do this, which does not require you to leave the broker’s website you prefer to trade with. We are talking about the Trader’s Calculator. A trading platform of every reputable broker should feature this convenient tool. With its help, a trader can calculate the pip value, the minimum price change, leverage, and many other parameters of the selected currency pair.

Learn more about the functionality of the Trader’s Calculator in the designated section of the InstaForex website.

Conclusion

We hope that this article will become a useful reference for you in your everyday trading routine. Understanding the basics of pip calculation is important for every trader who seeks to manage their deposits. Now you have a better understanding of how the forex market functions, what a pip is, and how to find its value. This knowledge will definitely help you lower the risks and get the deserved profit.