In this era of globalization, different online trading markets are used to trade currencies internationally. Traders from all around the world bid their currencies, place and conclude orders in order to gain profit. This is what a “Forex” or Foreign exchange market is.
Exchanging of foreign currencies globally through online platforms has given traders a vast amount of opportunities. To make the best use of these opportunities, traders have to be aware of the tiniest amount of change in their currencies.
And to keep track of that tiniest change in amount which is “pip” in the terms of forex trading, the traders need to calculate the per pip value.
Pip is the acronym of “ % in point” or “ Price Interest Point”. By definition, pip refers to the smallest price change that a given exchange rate can make. And the per pip value is the unit by which we measure the movement of the fourth decimal place ( second in JYP-based currencies)of the exchange rate.
Determination/Calculation of Per Pip value
We calculate per pip value as the 0.01th of 1% of the currency exchange rate. Or in other words, we consider the currency exchange rate’s fourth decimal place as 1 pip. This is applicable for most of currency combinations. You can know more from https://safetradebinaryoptions.com/pip-calculator/.
If we are more specific, then this “ fourth decimal place” is only for the currency combinations with USD either as their base currency or as quote currency. And the exception occurs when the Japanese Yen comes as one of the currency pairs. In the case of Japanese Yen, the per pip value is 1% of the currency exchange rate.
According to this,
USD based currencies’ per pip value or 1 pip = 0.0001
JYP related currencies’ per pip value or 1 pip = 0.01
There are reasons and explanations why we generally consider 0.0001 or the “Fourth decimal place” as the per pip value. Well, the major currencies like EURUSD, GBPUSD, USDCAD etc. are bought and sold in the Forex markets. Most often, the pairs are priced to fourth decimal places and the smallest change is that in the last decimal point. As a result of this, the value of a pip is dependent on that place.
For example, if the exchange rate of EUR USD is 1.1218, the fourth decimal place’s digit “8” is considered as pip. If the rate falls to 1.1213 or rises to 1.1223 then it will be said that “ 5 pip decrease” or “5 pip increase” respectively.
The traders trade their currencies and make profit or loss. This profit or loss is measured in pip point in forex markets. In either way, they need to know the pip value and convert that in their desired currency to know the amount.
If the traders use the formula to determine the pip value, they need to multiply the per pip value with trade size and then divide that by the exchange rate. Knowing the per pip value is important as this is used to determine the “pip value”. So, per pip value plays a significant role in that.
Hope, the above writeup will give you a clear idea about the per pip value and its calculation method.