Pips and Pipettes

Here is where we're going to do a little math. You've probably heard of the terms "pips", "pipettes", and "lots" thrown around, and here we're going to explain what they are and show you how they are calculated.

Take your time with this information, as it is required knowledge for all forex traders. Don't even think about trading until you are comfortable with pip values and calculating profit and loss.

What the heck is a Pip? What about a Pipette?

The unit of measurement to express the change in value between two currencies is called a "Pip". If EUR/USD moves from 1.2250 to 1.2251, that is ONE PIP. A pip is the last decimal place of a quotation, given that four decimal places are used for pairs without the Japanese yen. If a pair does include the Japanese yen, then the currency quote goes out two decimal places.

Very Important: There are brokers that quote currency pairs beyond the standard "4 and 2" decimal places to "5 and 3" decimal places. They are quoting FRACTIONAL PIPS, also called pipettes. For instance, if GBP/USD moves from 1.51542 to 1.51543, it moved ONE PIPETTE.

As each currency has its own value, it is necessary to calculate the value of a pip for that particular currency. In the following examples, we will use quotes with 4 decimal places.

In currencies where the U.S. dollar is quoted first, the calculation would be as follows:

1. USD/CHF at 1.5250

   .0001 divided by exchange rate = pip value
   .0001 / 1.5250 = 0.0000655

2. USD/CAD at 1.4890

   
   .0001 divided by exchange rate = pip value
   .0001 / 1.4890 = 0.00006715

3. USD/JPY at 119.80

   
   Notice this currency pair only goes to two decimal places (most of the other currencies have four decimal places). In this case, 1 pip would be .01.
   .01 divided by exchange rate = pip value
   .01 / 119.80 = 0.0000834

In the case where the U.S. dollar is not quoted first and we want to get the U.S. dollar value, we have to add one more step.

1. EUR/USD at 1.2200

   .0001 divided by exchange rate = pip value
   So .0001 / 1.2200 = EUR 0.00008196
   BUT we need to get back to U.S. dollars so we add another calculation which is
   EUR x Exchange rate
   So 0.00008196 x 1.2200 = 0.00009999
   When rounded up it would be 0.0001

2. GBP/USD at 1.7975

   
   .0001 divided by exchange rate = pip value
   So .0001 / 1.7975 = GBP 0.0000556
   BUT we need to get back to U.S. dollars so we add another calculation which is
   GBP x Exchange rate
   So 0.0000556 x 1.7975 = 0.0000998
   When rounded up it would be 0.0001

You're probably rolling your eyes back and thinking "Do I really need to work all this out?" Well, the answer is a big fat NO. Nearly all forex brokers will work all this out for you automatically, but it's always good for you to know how they work it out.

(See more) Lots, Leverage, and Profit and Loss

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