“PIPs” as a unit of measurement in the forex market
Knowing what PIPs are is one of the most fundamental parts of forex trading, as it is the unit of measurement used to express the magnitude of price fluctuations on a chart. PIPs are used to measure movements of price on forex pairs, in a similar way to which meters, feet, inches, and centimeters are used to measure distance in our everyday life. Therefore, it is important to understand this simple concept and learn how to calculate pips!
What is a pip in trading ?
The word “PIP” is an acronym which stands for percentage in point. In non-JPY (Japanese Yen) currency pairs, the PIP stands at the 4th digit after the decimal point. The 2nd digit after the decimal is where PIPs are in JPY currency pairs. We are going to illustrate a few simple examples to simplify this concept.
Calculating PIPs on different forex currency pairs
Let’s assume that GBPAUD was priced at 1.8005 one hour ago, and now the price stands at 1.8000. To express the movement that has occurred in price, it is said that GBPAUD has dropped by 5 PIPs, because the 4th digit after the decimal point went from 5 to 0. This rule of thumb can be applied to forex pairs that do not include the Japanese Yen.
We are now going to assume that GBPJPY traded at 153.50 earlier today, while now the price is at 153.58. To express the fluctuation of price, we say that price increased by 8 PIPs, because the 2nd digit after the decimal point increased by 8. This rule of thumb can be applied to JPY forex pairs.
Calculating PIPs on XAUUSD
One of the oldest currencies in the world is gold, which is also traded commonly in the forex market. Gold is one of the most loved financial instruments among forex traders, due to its high volatility which differentiates it from other currency pairs. The most common gold symbol is XAU/USD, which expresses the value of one troy ounce (31.10 grams) of gold in US dollars. PIPs on XAUUSD are located at the 1st digit after the decimal. Below you can find more practical examples to help you grasp the concept of the pip on different currency pairs, including gold.
Using Trading View to measure PIPs
PIP calculations will become second nature if you study the charts and trade enough, however calculating PIPs by using our mathematical thinking is not the most efficient way to go about it. Most charting platforms have a ruler tool. Trading View is the most popular charting platform among retail traders, you can find the ruler tool on the left sidebar, as depicted by the image below. Once you click on the ruler-looking symbol, you can measure the difference in PIPs on any forex pair you wish to do so, by clicking on one price and dragging your mouse to another price. We hope that after studying this lesson, you have learned what PIPs are in forex trading, and how to calculate them.