A “PIP” is the unit to measure the change in value between two currencies. It’s value is very small and gets at 0,0001 for currency pairs. There is only one exception, for Yen currency pairs, that are displayed in two decimals 0,01. A “PIP” has a standard value just to protect the investors from losing more that can afford it. Nowadays brokers provide you with fractional pips just to provide an extra precision.
For example if you have as currencies USD and EUR and the quote is 0,774 that means that for 1 USD you can purchase 0.774 EUR. In case there is an increase by one pip the quote gets 0.775, and the value of USD increases. After such increase you can buy more EUR.
The value of PIP depends on three aspects like currency pair, size of the trade and the exchange rate. Even if the value of the PIP is small, it can have a big impact over the open position.
To understand this process we’re going to take an example. Assuming you want to trade something that values 300.000$. The trade involves USD/CAD pair at 1.0568 close price after winning 20 pips. So if you want to find how much these pips mean in USD you have to follow the next steps:
- You have to know the value of a pip in CAD. To find out this you just have to multiply the amount of the trade with the value of the pip like this: 300.000 *0.0001=30 CAD/pip
- Now you have to find out the USD value. For that you have to divide the value of CAD/PIP at the closing exchange rate: 30/1.0568= 28.39 USD/PIP
- At the end, to find out the profit in USD, just multiple the pips gained with the value of one pip: 20*28.39=567.8 USD.
As you can see even if the values of pip is small it can have a major impact on your profit. Also you have to know very well what you are doing because the pip can affect you in two directions. You can win very easy but also you can lose just as easy as that.