A ‘pip,’ or a ‘Percentage in Point,’ is a single unit of the measurement of the movement of one currency in relation to another. One pip refers to the very last digit of a currency price.
For instance, the rate of EUR/USD is 1.3365, and a one pip movement would be 1.3366.
The major currencies are traditionally priced to four decimal places, and a Pip is one unit of the fourth decimal point: for dollar currencies this is to 1/100th of a cent.
It is the smallest price change that a given exchange rate can make.
In order to calculate the Pip value for stocks and indices, we first need to determine the size of the trade, which is determined by the invested amount, the leverage, and the current exchange rate. As an example, we will use BTC.
If you open a Bitcoin trade investing $5,000 with a x1 leverage, the unit calculation would be as follows: 5000 * 1 / 1256 (price of BTC on 15/3 at 23:59:59, this figure is changeable) = 3.98 units. Therefore, each pip would be worth $0.0398 (3.98 * 0.01).
The calculation for Currencies will be slightly different. As an example, we will calculate the spread for the GBP/USD instrument.
Opening a position with an investment of $1,000 and x100 leverage equals trading with 100,000 units. To find the value of each Pip, we would need to multiply 100,000 (units) by 0.0001 (Pip value) which equals $10 – this is the value per 1 Pip. Assuming the spread is 4 pips, we would need to multiply 10 by 4 which equals $40.
As an example, let's calculate the spread for EUR/GBP using the same position criteria ($1,000 investment with x100 leverage). The calculation will be as follows: 100,000 units x 0.0001 (Pip value) x 1.3345 (Base Major) / 0.8597 (Current Rate) = $15.52 P&L, per 1 Pip.
You can calculate the Pip value for each transaction using the eToro Pip Calculator.