For some reason many people (the beginners) find it hard to understand what a pip is. I can’t blame them since many people find it hard to explain in simple terms what a pip is.
So a pip is simply the following:
If the price right now for EUR/USD is 1.2876 and a split of a second later it is 1.2877, the price has moved up by 1 pip.
Again if the price right now for EUR/USD is 1.2876 and a split of a second later it is 1.2875, the price has moved down by 1 pip.
So a pip is just a measure of how much a price has moved (up or down) in a currency pair. All currency pairs use pips to measure the price movement, including the Yen even though the price is measured in two decimal places. For example if the price for USD/JPY is 102.12 and moved up to 102.15, the price has moved up 3 pips.
5 Digit Brokers
As we said many brokers display their prices using 5 digits, so in the above example EUR/USD would be 1.28765.
As we said many brokers display their prices using 5 digits, so in the above example EUR/USD would be 1.28765.
1 Pip up move is still 1.28775 and NOT 1.28766. Similarly
1 Pip down move is still 1.28755 and NOT 1.28764.
So do not get confused with the 5th digit. If there is a way to eliminate the 5th digit in my broker I just do it!
Ok, so we said that all currencies use pips to measure the change in the exchange rate, up or down. So EUR/USD use pips, GBP/USD use pips, USD/CAD use as well pips! All use pips! So the question is, how much is the value of a pip in a specific currency if my broker account is opened in US Dollars?
If I am trading USD/CHF, what is the value in US Dollars of 1 pip? Similarly the same question applies to GBP/USD or EUR/USD. How much 1 pip is worth?
That is a very important piece of information that you need to know for effective money management, just to protect your capital. We will go in to detail of how to calculate the value of a pip in a later article because there is still things to know prior calculating the pip value.
