What is a Pip?
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 x5 leverage, the unit calculation would be as follows: 5000 * 5 / 1256 (price of BTC on 15/3 at 23:59:59, this figure is changeable) = 20 units.
Now, we are looking at a position with a size of 20 units and we can calculate the Pip value. Simply multiply the amount of the units by 0.01, 0.001 or 0.0001, depending on how many digits follow the decimal point. Since this is a stock trade, we will multiple by 0.01 and so, each pip would be worth $0.2 (20 * 0.01).
The calculation for Currencies, will be slightly different. As an example, we will calculate the spread for the GBP/USD instrument.
The GBP/USD has a typical spread of 4 Pips. As an example, opening a position with an investment of $1,000 and x400 leverage equals trading with 400,000 units. To find the value of each Pip, we would need to multiply 400,000 (units) by 0.0001 (Pip value) which equals $40 – this is the value per 1 Pip. Assuming the spread is 4 pips, we would need to multiply 40 by 4 which results in $160.
However, if USD is not the quote currency (e.g: USD/CHF, GER30/EUR, GBP/JPY etc.), then the current market rate will need to be taken into account since a conversion is required.
As an example, let's calculate the spread for EUR/GBP using the same position criteria ($1,000 investment with x400 leverage). The calculation will thus be as follows: 400,000 units x 0.0001 (Pip value) x 1.3345 (Base Major) / 0.8597 (Current Rate) = $69.091 P&L, per 1 Pip.