Pip is short term for “percentage in point”. It is a tiny unit of movement in the cost of a currency that helps to identify and fix the slightest changes in quotes. Pip is measured with the fourth digit after decimal point — 0,0001, with one exaction for JPY, which is with the second digit after decimal point — 0,01.
Pips provide brokers with the option to track how much they earn or lose while trading.
The price of a pip depends on:
- the currency pair that is being traded,
- lot (volume) which is being traded,
- the exchange rate that is applied to a foreign exchange transaction.
Pip Example of Use
The main function of the pip is to provide traders with the ability to quickly estimate their profit or loss. In this case, a trader needs to know a monetary equivalent of 1 pip of the trading instrument they are trading.
A simple example can be shown on a popular USD/EUR currency pair. If the value of this tandem falls from 1,200 to 1,1150, then a trader can say: “The price has changed by 50 pips.”
To calculate the profit or loss from such changes a trader needs to multiply 50 pips on the cost of the pip. Let’s say the price of the pip in our example is $2, then the change in the rate costs 50×2=$100.
Almost every forex broker works all this out for its clients automatically.
What is a Pipette?
Some forex brokers suggest to quote currency pairs beyond the common “4 and 2” decimal places to “5 and 3” decimal places in order to provide an additional numerical place to track the exchange rates. This additional fifth or third sign is known as fractional pip, “point”, and also as “pipette”.
Pipsing Trading Strategy
The term “pipsing” in the forex industry describes a trading strategy that allows a trader to earn a few pips on short trades, which usually only lasts up to 2 minutes. That is usually from 1 to 5 pips. The key advantage of this trading method is obvious – it is much easier to predict the movement of the rate by 1-2 pips than to predict the rise or fall by tens of pips. Some professional traders use pipsing several times a day, which sometimes allows them to make good money. Among the negative aspects of pipsing there are: the intensive nature of work and emotional overstrain, high risks, the difficulty of trading during flat.