If you’ve come across the words “pip”, “pipette”, and “lots” while trying to get acquainted with the forex world and have wondered what it means or probably never heard of it before, we’ll be learning what these terms mean and how they are used. It requires some calculations, but not to worry, it will be broken down.

For starters, you should know that understanding pip values and calculating profit and loss is a necessity for every successful forex trader, so give your full attention to this one.

**What’s a pip?**

Pip is the unit of measurement used to express the change in value between two currencies. **Normally, the last decimal place of a price quote is a pip.**

For instance if USD/CAD moves from 1.1060 to 1.1061, that .0001 USD rise in value is ONE PIP.

Usually, currency pairs go out to 4 decimal places, however there are some exceptions like Japanese yen pairs which go out to two decimal places instead of the usual four.

For example, for EUR/USD, it is **0.0001**, and for USD/JPY, it is **0.01**.

What is a Pipette?

Another name for pipette is FRACTIONAL PIPS. Some forex brokers will rather quote currency pairs at “5 and 3” decimal places which is beyond the standard “4 and 2” decimal places.

A fractional pip or pipette can also be explained as a tenth of a pip. An example is, if GBP/USD moves from 1.40242 to 1.40243, that .00001 USD move higher is ONE PIPETTE.

Here is what a pipette looks like:

The pipette appears at the top right of the numbers.

Now here is how to read a pip.

Having that each currency has its own unique value, it’s important to calculate the value of a pip for the particular currency pair we are trading.

We will be using a quote with 4 decimal places in the following example;

For the purpose of better explaining the calculations, exchange rates will be expressed as a ratio (i.e., GBP/USD at 1.2500 will be written as “1 GBP / 1.2500 USD”)

To be read as 1 USD to 1.0200 CAD (or 1 USD/1.0200 CAD)

(The value change in counter currency) multiplied by the exchange rate ratio = pip value (in terms of the base currency)

**[.0001 CAD] x [1 USD/1.0200 CAD]**

Or simply as:

[(.0001 CAD) / (1.0200 CAD)] x 1 USD = 0.00009804 USD per unit traded

In other words, if we traded 10,000 units of USD/CAD, then a one pip change to the exchange rate would be approximately a 0.98 USD change in the position value (10,000 units x 0.0000984 USD/unit).

We say “approximately” because as the exchange rate changes, so does the value of each pip move.

Another example using a currency pair with the Japanese Yen as the counter currency which goes to two decimal places only. Here, a one pip move would be .01 JPY.

(The value change in counter currency) multiplied by the exchange rate ratio = pip value (in terms of the base currency)

**[.01 JPY] x [1 GBP/123.00 JPY]**

Or:

[(.01 JPY) / (123.00 JPY)] x 1 GBP = 0.0000813 GBP

Therefore, when trading 10,000 units of GBP/JPY, each pip change in value is worth 0.813 GBP approximately.

In figuring out the pip value of your position,it is important to find the pip value in terms of your account currency.

Since it is a global market and not everyone has their account denominated in the same currency the pip value will have to be translated to whatever currency our account may be traded in.

All you need to do is simply multiply and divide the “found pip value” by the exchange rate of your account currency and the currency in question respectively.

If the “found pip value” currency is the same currency as the base currency in the exchange rate quote:

We’ll be using the GBP/JPY example above, let’s convert the found pip value of .813 GBP to the pip value in USD by using GBP/USD at 1.5590 as our exchange rate ratio.

If the currency you are converting to is the counter currency of the exchange rate, all you have to do is divide the “found pip value” by the corresponding exchange rate ratio:

**.813 GBP per pip / (1 GBP/1.5590 USD)**

Or

[(.813 GBP) / (1 GBP)] x (1.5590 USD) = 1.2674 USD per pip move

So, for every .01 pip move in GBP/JPY, the value of a 10,000 unit position changes by approximately 1.27 USD.

If the currency you are converting to is the base currency of the conversion exchange rate ratio, then multiply the “found pip value” by the conversion exchange rate ratio.

Using our USD/CAD example above, we want to find the pip value of .98 USD in New Zealand Dollars. We’ll use .7900 as our conversion exchange rate ratio:

**0.98 USD per pip X (1 NZD/.7900 USD)**

Or

[(0.98 USD) / (.7900 USD)] x (1 NZD) = 1.2405 NZD per pip move

For every .0001 pip move in USD/CAD from the example above, your 10,000 unit position changes in value by approximately 1.24 NZD.

And you don’t necessarily have to lay down your calculation like this you know, most brokers just give you direct answers, however, it is good to know how they arrive at their answers.

In the next lesson, we will discuss how these seemingly insignificant amounts can add up.

Click on this LINK to create an FXTM Demo or Live Trading account >>> OPEN ACCOUNT

Click on this LINK to create a HotForex Demo or Live Trading account >>> OPEN ACCOUNT