What is pip in Forex
One of the most common terms used in Forex is Pip. The easy answer is a pip in Forex markets is a fractional change or movement of currency pair from 1 point to another. This is also called a fractional change in price after a decimal point. If you are still confused! Don’t worry; let me break this down for you.
Let’s take an example of USDJPY currency pair.
109.355 – 109.354 = 0.001 = 1 pip
109.359 – 109.354 = 0.005 = 5 pips
Here is another visual example to establish more understanding about pip value.
As can you see in above picture, the USDJPY pair value is increased from 104.083 to 104.084. This means the pair is moved 1 pip up. In more financial terms, the USD (Dollar) is appreciated against Yen or the Dollar is become stronger against Yen currency. If you didn’t understand the last statement then don’t worry! we will have plenty of opportunity to learn more financial jargon.
Now can you guess “how many pips USDJPY moved in second example?” yes correct, it’s 5 pips. Because the difference between 104.088 – 104.083 = 0.005 = 5 pips
The important thing we need to remember that the pip in forex changes between brokers to brokers. Sometimes the broker quotes 3 decimals point after digit and sometimes 4. Let’s understand this with the FXCM Broker example.
FXCM Forex Broker
let’s take a look at how the FXCM pip value is quoted in the trading station. FXCM quotes 2 digits after decimal for all JPY currency pairs. For example USDJPY, GBPJPY, CADJPY, NAZDJPY, AUDJPY, CHfJPY,EURJPY.
As highlighted in red rectangle, the pair USDJPY value is provided in 2 digits after a decimal.
For Non-JPY pairs, FXCM quotes 4 digits after the decimal point (i.e. 0.0001). these pairs are EURUSD, GBPUSD, CADJPY, EURGBP, AUDCAD etc
The above picture provides the EURUSD pair example and the pips are quoted in 4 digits, after the decimal point.
As I explained above, these pip values changes from broker to broker but the principle is the same.
So far so good! Now let’s move on to the next topic and understand the different Forex Trading Accounts and how currency denomination affects the pip value calculation