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In order to trade successfully you need to understand what a pip is and how to calculate its value.
A pip stands for "percentage in point" and is the smallest price change that a given exchange rate can make
An increase or decrease in pips represents a profit or a loss in your forex trade. Let me explain further!
When currencies are quoted, they are mainly quoted to the fourth decimal place (this is also true for silver and heating oil).
Exceptions are pairs that include the Japanese yen (as well as commodities such as gold, oil, brent and gas), which are quoted to two decimal places.
When we look at the EUR/USD pair and see it move from 1.3130 to 1.3131 it has moved 1 pip (because the fourth decimal point has increased by 1).
A one pip move for the USD/JPY we can see as 77.60 to 77.61 (because the second decimal point has increased by 1).
In major pairs quoted against the USD, we calculate the value of a pip as follows:
The EUR/USD has an exchange rate of 1.3130. If 1 pip equals 0.0001, we divide 0.0001 by 1.3130 which gives us a pip value of €0.0000761.
Let's turn this into a forex deal to see what the pip would represent in either a profit or loss.
Deal 1: Sell €100,000 worth of EUR/USD, at 1.3130. Pip value in euro terms is 0.0000761 x 100,000 = €7.61 (or exactly $10!). If the deal is closed at 1.3120, with a 10 pip profit, the total profit would be €76.10, or $100.
Deal 2: Buy $50,000 worth of USD/JPY, at 77.60. Pip value in dollar terms is 0.01/77.60 x 50,000 = $6.44 (or exactly ¥500!). If the deal is closed at 77.50, with a 10 pip loss, the total loss would be $64.43, or ¥5,000.
It is our commitment to provide our traders with access to the best fixed spreads and execution methods, and this is why you may at times notice additional smaller numbers at the end of a currency rate. These numbers are referred to as "Fractional pips" and are a new pricing feature which lets you see more price action detail and helps you make more informed trading decisions. A fractional pip is a tenth of a pip and the addition of this feature to your account allows you to take advantage of smaller price increments and moves in the market.
Instead of quoting prices to two or four decimals, with fractional pips we quote an extra digit. For example, normally EURUSD ask would be quoted as 1.3251, while with fractional pips we quote 1.32508, with the last smaller digit representing the fractional pip.
Earlier we mentioned deals of 100,000 euros and 50,000 dollars which may have seemed quite large, especially if you are new to trading, but this is where an important factor comes in - the use of leverage. Leverage basically means you can trade larger amounts than your initial investment. View our video "What is leverage?" to find out how it is used in the forex market. You can also visit the Learn section of our website where you can explore the rest of our educational tools such as our eBook and sign up for our online webinars.