The forex market is an interesting place where even the slightest movement has the potential to have a great impact on money.
That’s why something known as PIPs exist and knowing everything about PIP calculation in forex trading can be useful. Lucky for you, that’s exactly what we’re going to cover in this story!
What is a PIP in Forex Trading?
PIP is short for Percentage in Point and represents the smallest number by which a currency pair’s exchange rate can increase or decrease. For most currency pairs, a PIP is in the fourth decimal.
For example, you’d say that USD-INR moved by 1 PIP if the rate goes from 81.5300 to 81.5301.
That’s why currency exchange rates are quoted up to four decimal points, although there are exceptions to this which we will get to later on.
At this point, you must be thinking about why someone would quote an exchange rate for four decimals when two could do the job. That’s the norm for shares and commodities. Here’s the reason.
While a movement in the fourth decimal place may seem tiny, its impact on a large scale can not be understated. That’s why PIPs are super important when buying and selling currency derivatives.
Furthermore, PIPs are not just limited to a single pair of currencies, they’re used across the world when it comes to trading currency pairs, whether you want to trade USD-INR or EUR-USD.
We’ve covered all this in detail here: What a Pip in Forex Means
How is PIP Value Calculated in Forex?
PIP Calculation in Forex Trading = [.0001] x [Value of Base/ Value of Quote]
While the PIP is typically the smallest possible movement in a currency pair’s exchange rate, the actual value of the PIP can vary based on the pair in question. Let’s go one INR pair at a time!
Value of 1 PIP in Forex for INR Currency Pairs
We know that the PIP is the fourth decimal place which is nothing but 0.0001. That’s the first thing we need to calculate the value of a PIP. Next up is the exchange rate.
- USD-INR = 1:81.5300
- EUR-INR = 1:84.9400
- GBP-INR = 1: 98.7100
All we have to do is plug these values into the formula to get the PIP value for each currency pair.
- USD-INR PIP Value = [.0001] x [1/81.5300] = 0.0000012265
- EUR-INR PIP Value = [.0001] x [1/84.9400] = 0.0000011773
- GBP-INR PIP Value = [.0001] x [1/98.7100] = 0.0000010130
PIP Calculation in Forex Trading for JPY Pairs
Remember the exception to PIPs we spoke about earlier? That was related to JPY pairs. The PIP is in the second decimal place for JPY pairs instead of the fourth.
Thus, the PIP value for the JPY pair will be calculated using 0.01 as the PIP instead of 0.0001. Let’s plug this into the formula and see what we get.
- JPY-INR = 1:58.8200
- GBP-INR PIP Value = [.01] x [1/58.8200] = 0.00017001
P.S.: Even the forex lot size for the INR-JPY pair is different.
Calculating PIPs is simple. You can use the formulae mentioned above to understand the value of each PIP. But the why behind the process is important.
The thing is, knowing how to calculate the value of PIPs can be useful, especially when it comes to swing trading or scalping where small profits per trade are important.
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