 # Pips not Ticks!

When trading currencies, the term PIP is used often. A pip, which stands for “price interest point,” represents the smallest fluctuation in the price of a currency. This is similar to the “tick” concept for stocks.

So how much is a pip worth? The value of a pip depends on the size of the contract (or lot) that is traded. Most online forex brokers offer regular contracts (or lot) sizes of 100,000 units of the base currency. With this figure in mind, we can determine what a pip is worth. Let’s work with the same quote or exchange rate used in the previous section, EUR/USD = 1.2125.

If…

1 euro equals 1.2125 dollars, then 1 lot (or contract) of 100,000 euros should be worth 121,250 dollars and a fluctuation of 0.0001 (1 pip) should be worth 100,000 x 0.0001 = 10 dollars.

Therefore, every time the price of the euro versus the dollar fluctuates by one pip, the value of each contract should change by 10 dollars. For currencies that are quoted in terms of dollars (that is, when the USD is the quote currency), the PIP value is fixed (10 dollars if the currency is quoted to the fourth decimal place). This is what is called a “static pip value” because the value is constant relative to the dollar. Mayor currencies (other than the EUR/USD) with a static pip values are the GPB/USD (British Pound versus the US Dollar – also known as “cable”) and the AUD/USD (Australian Dollar versus the US Dollar – also know as “aussie”).

Are there currencies with a “variable pip value?” Yes there are.

A currency with a variable pip value is one that has the dollar as the base currency. The mayor currencies or “mayors” with a variable pip value are the USD/JPY, the USD/CHF (US Dollar versus the Swiss Franc), and the USD/CAD (US Dollar versus the Canadian Dollar). Using the example of the USD/JPY = 107.65 in the earlier section…

If…

1 USD equals 107.65 yen, then 1 lot of 100,000 dollars should be worth 10,765,000 yen and one pip should be worth 100,000 x 0.01 = 1000 yen.

If we want to convert this value into dollars, we have to divide by the current exchange rate (107.65 yen per dollar). Thus, 1000 / 107.65 = 9.29 dollars. We automatically conclude that the value of one pip in the dollar-yen currency pair (in terms of dollars) will always vary as the exchange rate varies.

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