Forex Trading Tutorial for Newbies: Understanding Forex Pips

Forex Trading Tutorial for Newbies: Forex Pips

We take forex trading tutorial seriously when it comes to pip and ‘pips value’. We hope you have read and understood terms we used earlier in our forex trading tutorial because pips and pip values are one of the most misunderstood concepts in Forex trading. Newbies, especially, often have trouble grasping the idea behind pips. With a solid understanding of pips, we are on a successful journey to Forex investing.

For those of you who are having trouble with pips, you’ve come to the right place.  Today we are going to attempt to clarify things once and for all with a brief pips for forex trading tutorial.

Pip is the smallest price change that a given exchange rate can make. Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point - for most pairs this is the equivalent of 1/100^th of one percent, or one basis point. Pips are the Forex market’s version of basis points. The smallest move in a currency does not always need to be equal to one basis point, but this is generally the case with most currency pairs.

The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and  0.01% = 1 basis point. Let’s hypothetically assume that the exchange rate for the EUR/USD pair move from 1.4460 to 1.4463. This movement represents a shift of 3 Pips.

Below is some more definition and examples of pips from youtube video:

In order to calculate pips for most currencies you must divide the value of 1 pip by the exchange rate.  To calculate pips values for the purchase of a standard lot of 100,000 pairs of EUR/USD at 1.4461, the formula will be as follows: pips value = (0.0001 / 1.4461) x 100,000 = 6.915.  So, a pip at this exchange rate is roughly worth 6.915 Euro. ‘6.915’ represents the average gain or loss per change in pips.  Below is a video showing the current market pips values:

With the Japanese Yen (because the yen has little value compared to other currencies), we find an exception to the rule because the Yen is quote out only to the hundreds place, or 1/100.

For the USD/JPY pair (or vice versa), your formula would be: 1 pip = (1/100) / exchange rate. Since there are about 120 yen to 1 USD, a pip in USD is close in value to a pip in JPY.

Our forex trading tutorial has just showed you how to calculate pips for any currency pairs, you must also look at what an actual pip is worth to you in real dollar terms. In order to do this, we must bring ‘lot size’ into the equation.  We will discuss ‘lot size’ in more detail later in forex trading tutorial.

In reality, your online broker usually calculates pip and pips values for you, and you don’t have to know how to do the math. It’s wise to be able to do it yourself. We recommend getting comfortable with these basic calculations first before moving on to the calculations of actual profit and loss, which will require you to factor in ‘bid price’ and ‘ask price’ which have been mentioned earlier in our forex trading tutorial.