If you've done any research into forex or CFD trading, you've likely come across the term 'pip' frequently but may be unclear exactly what it represents. A pip is the smallest incremental price change that a given instrument can undergo. It is the basic unit of measurement used in quoting currency prices and measuring profit or loss in forex trading.
Understanding what a pip is and how profits and losses are calculated in pips is crucial for any trader looking to navigate the forex markets successfully. This article will explain in simple terms what a pip is and how it impacts trading with examples from popular currency pairs that Canadian traders can access through brokers like Dominion Markets.
Pip Definition for Major Currency Pairs
Pip stands for "percentage in point" and refers to the fourth decimal place for major currency pairs. The value of a pip depends on the currency pair being traded. Here are some commonly quoted examples:
- EUR/USD (Euro vs US Dollar): 1 pip = 0.0001 or 1/100 of a cent.
- USD/CAD (US Dollar vs Canadian Dollar): 1 pip = 0.0001 or 1/100 of a cent.
- GBP/USD (British Pound vs US Dollar): 1 pip = 0.0001 or 1/100 of a penny.
- AUD/USD (Australian Dollar vs US Dollar): 1 pip = 0.0001 or 1/100 of a cent.
For exotic and minor pairs, the pip may sometimes refer to the second or third decimal place instead of the fourth. But for major pairs that make up the bulk of forex volume, it is always the fourth decimal place.
Calculating Pip Profits and Losses
To calculate profits or losses from a trade, simply count the number of pips the price moved in your favor as profit or against you as loss and multiply it by the pip value for that currency pair.
For example, if you entered a long trade on EUR/USD at 1.1000 and exited at 1.1005, you made a 5 pip profit. Since each pip on EUR/USD is worth $0.0001, a 5 pip move would yield a profit of 5 * $0.0001 = $0.0005 or 0.05 cents per 1 mini lot.
Similarly, if the trade had moved 5 pips against you and you exited at 1.0995 instead for a loss of 5 pips, that would yield a loss of $0.0005 or 0.05 cents per mini lot.
Pip Value Scales with Position Size
It's important to note the pip value scales directly with your position size. Dominion Markets, for instance, quotes currencies in standard lots of 100,000 units of base currency.
Therefore, on a standard EUR/USD lot worth $100,000, each pip movement would be worth $10 instead of $0.0001. And on a micro lot of just 1,000 units, it would be $0.01 per pip. Carefully calculating pip value for your chosen position size is crucial for precise risk management and trade evaluation.
Real World Pip Examples
To wrap our head around pips in a more practical manner, here are some real world examples of recent pip movements for major currency pairs:
- EUR/USD fell 70 pips from 1.1050 to 1.0980 over the June US CPI print.
- USD/CAD spiked 150 pips higher from 1.3000 to 1.3150 on a strong US jobs report.
- GBP/USD plunged 300 pips following the UK election from 1.3500 all the way down to 1.3200.
As you can see, major events can often trigger pip movements numbering in the hundreds. Proper risk management is critical when trading with position sizes that could incur substantial profits or losses from such large currency price fluctuations measured in pips.
In summary about what is a pip in trading, understanding what constitutes a pip is fundamental for any trader. It serves as the basic unit to track currency price action, evaluate trade outcomes, and manage risk on the forex markets or when trading other pip-quoted assets through brokers like Dominion Markets.