“How pips function and how to determine pip value”

In the forex market, currency pairs are expressed with decimal points to show the exact exchange rate between two currencies, allowing traders to track and respond to even the tiniest price fluctuations.

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What is a pip in forex trading?
A pip, short for “percentage in point,” is a standard unit used to measure the change in value between two currencies.

The number of decimal places in a forex quote indicates the relative value of the currencies involved. For most currency pairs, a pip corresponds to the fourth decimal place (0.0001). For instance, if EUR/USD rises from 1.1015 to 1.1016, that represents an increase of 1 pip.

Pairs that include the Japanese yen are usually quoted to two decimal places (0.01) because the yen has a lower value compared to other major currencies. For example, if USD/JPY moves from 144.30 to 144.32, it has risen by 2 pips.

What is a pipette?
Although a standard forex pip equals 0.0001 or 0.01, brokers often quote prices with an extra decimal place—five for most pairs, three for yen pairs. These additional decimal places are called “points” or “pipettes.”

For example, if EUR/USD moves from 1.10161 to 1.10162, that represents a change of 0.00001 USD, and if USD/JPY moves from 144.323 to 144.324, that’s a change of 0.001. Each of these small movements equals one pipette, or one-tenth of a pip.

Pipettes are especially valuable for capturing small price movements and for traders who need greater precision in their analysis.

Calculating pip values
The value of a pip in monetary terms depends on the trade size and the specific currency pair. Traders can use Deriv’s pip calculator to estimate pip values using the following formulas:

For direct currency pairs (where USD is the quote currency), such as EUR/USD:

Pip value = point value × volume × contract size

For example, trading 2 lots of EUR/USD results in a pip value of 2 USD.

For indirect currency pairs (where USD is the base currency), such as USD/JPY:

Pip value = (point value × volume × contract size) ÷ exchange rate

For example, if the USD/JPY exchange rate is 144.324, trading 2 lots of USD/JPY results in a pip value of 1.39 USD.

Grasping how pips function helps traders better understand market movements, assess risk, determine position sizes, and evaluate how price changes affect their trading strategies. This knowledge allows traders to make more informed decisions and manage trades with greater accuracy and confidence.

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