Trading Academy

Lesson 8

Pip (Point). Cost of the pip. How is it calculated?

There are two popular acronyms for the term “pip”. One is “Percentage in Point” and the other is “Price Interest Point”. Basically, a pip is the unit of measurement to express the change in value between two currencies. 

For example, seeing the AUD/USD  quote going from 0.8611 to 0.8610, we would call that a price decline of 0.0001, or 1 pip. If the current price of USD/JPY is 118.13 and it goes to 118.14, this is a price rise of 0.01, or 1 pip. One pip is thus the smallest change in value for a quote that allows two or four decimal places. 

However recently, more and more brokers went beyond the standard four and two decimal places, offering quotes with five and three decimal places. This third or fifth decimal is commonly known as Pipette. A broker could quote NZD/USD as 0.78586. If that goes to 0.78587, the movement is termed as a 1 pipette rise.

How do we calculate the value of one pip?

The value of a pip differs from one currency to another. The difference comes from whether the U.S. dollar is the base currency or the counter currency. The next two examples will illustrate just that.

U.S. dollar as base currency

The price of USD/CAD is 1.1332. The smallest movement for a pip is thus 0.0001. To calculate the value of one pip, the formula is:

Pip Value = Smallest decimal move / Current exchange rate

  = 0.0001 / 1.1332

  = 0.000882

The value of 1 pip when the USD/CAD is at 1.1332 is USD 0.000882.

U.S. dollar as counter currency

The price of AUD/USD is 0.8613. The smallest movement for a pip is thus 0.0001. To calculate the value of one pip, the formula is:

Pip Value = Smallest decimal move / Current exchange rate

  = 0.0001 / 0.08613

  = 0.001161

Needless to say, this calculation will always be done for you automatically by every single broker you might trade with.

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