The pip is one of the measurement units used in the forex market. It is very useful for us to be able to observe the movements of currency quotes in order to calculate the risk in our operations. Additionally, we have other types of measurement in the world of investments. Don't you quite understand what they are and how you can calculate the value of one? Better keep reading and so you can clear your doubts...
The PIP in trading
The term pip (Point In Percentage in English) translated into Spanish means porcentual point. The pips allow us measure the smallest movements of the price of a currency pair in the forex markets. This measure allows us to measure the variations in the price of an asset in a transaction. It is a unit that also allows us calculate the risk of our operations to protect our capital in case of large variations.
Value in pips of each position in a currency quote.
When we talk about a pip in most currency pairs we are referring to the fourth decimal movement after the point in a currency pair. But in the case of currency pairs that go with the Japanese yen (JPY), the pip value is fixed on the second decimal, since the Japanese yen has three figures in its quote before starting the decimals.
How to calculate the value of a PIP
Now that we know what a pip is, you may be wondering how you can do it. calculate the value of a pip to be able to apply it when carrying out operations. First hand, the value of the pip is determined according to the exchange rate of currency pairs that we are going to operate, is not universal for all pairs. Let's give an example with the EUR/USD currency pair to explain the calculation of the value of a pip:
- The EUR/USD pair is currently trading at 1,0989, that is, with each euro we get 1,0989 dollars. Therefore, the value of each pip will be measured in the base currency, that is, the euro.
- To get the value of a pip, we will use the following formula:0,0001 USD x (1 EUR / 1,0989 USD) = 0,00009100 EUR
- We already have the pip value of said quote. In order to calculate the value of each pip in a position that we are going to exercise, we must multiply the number of units of the pair that we have chosen and multiply it by the value of the pip that we have obtained in the previous calculation, for example:10.000 units of the EUR/USD pair) x 0,00009100 EUR = 0,91 EUR.
Let us remember that the value of each pip varies depending on the price present in each currency pair.
Difference between Pip, Tick and Punto
Within the jargon that is commonly used in the world of investments we can see relationships between definitions. In the case of the pip it also has its relationships, which are the tick and the dot. You may wonder what is the difference which lies between these three definitions, let's see below what ticks and points are:
What is a Tick in trading
As we have seen with pips, ticks represent the smaller price changes for markets, located on the right side of the decimal point. The tick is the pip representation in the different available markets, but its value varies depending on the market in which we operate. For example:
- In the stock market, ticks are equivalent to 0,01 dollars, since shares move in values ​​of 0,01 dollars.
- In the futures market vary depending on the futures contract that we are operating. In the futures of oil each tick is equivalent to 0,01, in gold futures it is 0,10 and in S&P 500 E-Mini futures it is equivalent to 0,25.
The tick value differs depending on the market we operate.
What is a Point in trading
The point may vary depending on whether we are talking about the foreign exchange market or others. In the foreign exchange market, the point is fifth decimal unit of measurement of the price of a currency pair, which would be behind one pip. The point is the smallest unit of measurement within the foreign exchange market, also popularly known as a "pipettes«.
Reference on points or "pipettes" in the forex market.
It also has its interpretation for the other investment markets. On the other hand, points are the unit of measurement for the values ​​located at the left of decimal point of a quote. With the tick we could measure the price variations located to the right of the decimal point, with the point we measured the variations located to the left. For example, if we see a price variation in the price of gold from 1928 to 1929, it means that gold has gone up one point. We contrast that points are composed of ticks, so one point in gold would be equivalent to 10 ticks.