I still find it very funny that some traders do not yet know what is a pip and those who know cannot differentiate it from a point or pipette.
This is a very essential knowledge in forex trading because you will be seeing this almost at all times on the chart so take this lesson very serious.
What is a pip?
In the previous lesson on “how to read forex quote” I showed us that forex quotes are most times written this way EURUSD 1.25642/53.
Most people find it easier to read because they can quickly identify how many points or pipettes and pips are there.
Can you identify the number of pips that is there?
If the answer is YES, then that is good but if the answer is NO then that will take us to the definition of what is a pip.
A pip is the fourth digit after the decimal point on a price quotation or exchange rate. That’s the simple answer. That means on EURUSD 1.25642/53 the pip here is 1.1 pips or we can simply say 1 pip and 1 point.
How did I calculate this you might be wondering, I just looked at it and said the magic word.
Hahahahahaha am just joking. The best and easiest way to get the number of pips in the above currency quote is to substrate 1.25642 from 1.25653 and that will give us 0.00011. But, as you grow in this market you would be able to just do a mental sum by just looking at it.
When you substrate the bid and the ask price it gives just the spread just like what is in the example above and the spread are in pips or points.
What is a point or pipette?
Most forex traders do not pay intention to point and pipette in a forex chart. This is because a point or pipette the smallest change in a currency. Few years ago most brokers where using the 4 digit pricing system but almost all regulatory bodies now require brokers to be using the 5 digit pricing system. The last digit on a forex quote is the point example EURUSD 1.25642 the last digit which is 2 is the point or pipette.
What is this digit system?
If you should open your trading terminal such as Meta Trader 4 or 5 you would see the market quote such as EURUSD 1.25642. If you count from after the decimal point you will notice they are 5 digits. There are broker that still uses the 4 digit pricing system where there are only just 4 digits after the decimal point is most time considered as a scam broker and in other times it can be based on the type of account you have with the broker- though we will talk more about that in choosing your broker.
Let me explain similar ways to calculate pips since points or pipette are barely useful forex traders
Let’s assume that the price of a GBPUSD currency moved 1.79422 to 1.79653 most traders would have been thinking on how to calculate this but if just as simple as A B C.
You have to subtract the smallest figures from the highest figure and that will be 1.79653-1.79422 =0.00231. That is 23 pips and 1 point
Can you see how easy it is?
Now let’s go over to the pairs involving Japanese Yen (JPY). Pairs where the JPY is also quoted have a 3 digit system just like USDJPY.
In such pairs a pip is not the fourth digit but the second digit and a point or pipette is the last 3 digit
So let me give an example;
USDJPY moved from 118.567 to 117.905 and we want to know how many pips it moved.
We subtract the smallest figure from the highest figure which is 118.567 -117.905= 0.662 which is 66 pips and 2 points.
I decided to add this like an additional note.
When you want to impress your friends you can refer to 0.00231 as 231 points or pipette and 0.662 as 662 points or pipette. This is because 10 pipette or point makes 1 pip.
In summary, pips are very small and may sometimes be consider as not useful because with the aid of technology now nearly all Forex brokers will work this out for you automatically in there platform but it’s always good for you to know how they work it out.
But these small pips, when compounded with a good lot size brings good returns to the traders.
We have come to the end of this lesson if by chance you are still confuse and need more clarification don’t forget to contact me.
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