Tuesday, September 11, 2012

What is a Pip? What you should know.

Good morning Traders,

PIPstands for Point In Percentage.   More simply though, a pip is what we in the FX world consider a “point” for calculating profits and losses.  In a standard (10k) account, each pip is worth roughly one unit of the currency in which your account is denominated.  If your account is denominated in USD, for example, each pip (depending on the currency pair) is worth about $1.  In a micro account, each pip is worth roughly 1/10th the amount it would be worth in a standard account -- so about $0.10.
In all pairs involving the Japanese Yen (JPY), a pip is the 1/100th place -- 2 places to the right of the decimal.   In all other currency pairs, a pip is the 1/10,000 the place -- 4 places to the right of the decimal.

You’ll see that in the Trading Station the digits for pips are in a larger font.  This makes them easier to see.
At  Optionbit:  we quote each currency pair with precision to 1/10th of a pip.   So you’ll see quotes listed to the 1/1,000th place for JPY pairs and you’ll see quotes listed to the 1/100,000th place for all other pairs.  This fraction of a pip allows price providers to bring spreads down even further as they are not restricted to quoting in full pip increments. 

Now for how to calculate the value of a pip.  There is a simple equation.  
First you start with the size of your trade.  Micro lots are 1k, so if you want the value of a pip for a micro lot you start with 1,000.  If you want the value of a pip for a standard lot, you start with 10,000.  You then multiply your trade size by one pip for the pair that you are trading.
I may have lost some people there so we’ll go through an example.  
In my example here we are going to calculate the value of a pip for one 10k lot of EUR/USD.
So since I am using standard 10k lots, I’m starting with 10,000.  I multiply 10,000 by .0001 since 1/10,000th is a pip for all pairs (except JPY pairs).
That gets me a value of 1.  That will be valued in the “counter currency” (second currency) of the pair that I am trading.  In this example, I am trading EUR/USD, so USD is the counter currency of the pair.  One pip is worth 1 USD dollar for one 10k lot of EUR/USD.
If my  Optionbit:  account is based in US Dollars, then I will see $1 of profit or loss on my account for every 1 pip move that the EUR/USD makes in the market. 
Now, if my Optionbit:   account is based in British Pounds (GBP), I would have to convert that $1 USD into Pounds.  To do so, I just divide by the current GBP/USD exchange rate which at the time of writing is 1.5829.  I’m dividing here because a Pound is worth more than a USD, so I know my answer should be less then 1.1 divided by 1.5829 is 0.6318 Pounds.   So now I know that if I have a Pound based account, and profit or lose one pip on 1 10k lot of EUR/USD, I will earn or lose 0.6318 Pounds.
Let’s do another example of GBP/JPY
Again we’ll go with a one 10k lot trade.
This time a pip is .01 because it is a JPY pair.  
10,000 times .01 is 100.  Again, that “100” is in terms of the counter currency, so it is 100 Japanese Yen (JPY).
Now we need to convert that 100 JPY to the denomination of your account.  If you have a USD based account, then you take the 100 JPY and divide it by the USD/JPY spot rate, which at of the time of writing is 91.09.  That gets you an answer of $1.098 per pip.
To help understand pips and pip calculations even further you may want to consider doing some practice calculations on your own.  
To make things easy for you   Optionbit:    :  displays the value of a pip for each currency pair in the Trading Station, in the currency that your account is based in.  In the advanced Dealing rates view you’ll see it shown between the “Roll S” and “Roll B” fields.

In the Simple Dealing Rates view you’ll see it listed under the Pip Cost column.

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