What Is PIP (and PIPETTE) in Forex Trading?

When you start learning about Forex trading, one of the first concepts you will see is the concept of pip. In this article we are going to see what a pip is and what a pipette is in Forex trading. We will also see when to use these terms and how to calculate the pip value. Lastly, we will look into some useful MQL4 function related to pips.

What is a PIP and a PIPETTE?

By definition, the PIP is the Price Interest Point. A pip is the unit of measurement for the change of value in the exchange rate of two currencies. For currency pairs with 4 decimals, 1 pip = 0.0001, while for JPY-quoted pairs, 1 pip = 0.01. Too complex? A couple of examples will make it clearer.

Let's assume that EUR/USD is trading at 1.0799 meaning that with 1 EUR you can buy 1.0799 USD. If the rate changes to 1.0795, it means that there is a difference of 1.0799 - 1.0795 = 0.0004, which is 4 pips. If USD/JPY is quoted at 107.38, meaning that with 1 USD, you can buy 107.38 JPY, and then it changes to 107.40, it means a price change of 107.40 - 107.38 = 0.02, which is 2 pips.

Due to the evolution of technology, increased popularity of online trading platforms, and higher volume of trades, Forex brokers have started to present exchange rates with 5 decimal places for normal pair and 3 decimal places for JPY pairs. This has resulted in the introduction of a new term: pipette.

A pipette is a 1/10 of a pip. Usually, it is the last decimal (the 5th for normal pairs and 3rd for JPY pairs) in the exchange rate. 10 pipettes = 1 pip.

When to Use Terms Pip and Pipette?

Pip is still the most used term in the daily Forex trading jargon. Usually, pip and pipette are used to:

• Express the spread — example: "the spread is 3 pips", meaning that the difference between the ask and the bid price is 3 pips.
• Express a price change — "the price has dropped by 120 pips."
• Express a gain or profit — "I made 40 pips with that trade."
• Express a loss — "I lost 50 pips in EUR/USD."
• Express the distance between the open price and the take-profit or stop-loss price — "A stop-loss of 30 pips and a take-profit of 60 pips", meaning the stop-loss price will be 30 pips from the open price, and the take-profit 60 pips away.

How to Calculate Pip Value?

You would need to calculate a pip value when you want to understand the profit/loss of a trade and to implement risk management strategies.

A pip value is always calculated for a size or volume, usually a standard lot (100,000 units), a mini lot (10,000 units), or a micro lot (1,000 units). The first step to calculate a pip value is to multiply the volume for 0.0001 (0.01 in case of JPY pairs) — this will give you the value in the quote currency.

Example 1: In a trade of 20,000 units of EUR/USD, you multiply 20,000 × 0.0001 = 2, which is the pip value in USD, in other words, 1 pip of change in the exchange rate is a profit/loss of 2 USD.

Example 2: In case of 30,000 units of USD/JPY, the pip value would be 30,000 × 0.01 = 300 JPY.

A pip value expressed in the quote currency is not always useful. Usually, you want to have the value expressed in your account currency. Once you have the pip value in another currency you just need to convert it to your currency. So, in the second example above, 300 JPY pip value can be converted to USD knowing the current USD/JPY exchange rate (let's say, USD/JPY is at 107.40). Then, 300 JPY / 107.40 USD/JPY = 2.79 USD per pip.

MQL4 and Pip Value

If you are learning about MQL4 and trading automation with MetaTrader 4, you will be happy to know that MQL4 has some native functions to retrieve the instrument's pip value and the default lot size.

We already introduced the concept of a tick in MQL4. Basically, a tick is the smallest change that a price can have. MQL4 provides the following information natively:

• MarketInfo(Symbol(), MODE_LOTSIZE) gives you the default lot size, so you know what the tick value refers to.
• MarketInfo(Symbol(), MODE_TICKVALUE) is the tick value for the selected currency pair (Symbol()) in the account currency.
• MarketInfo(Symbol(), MODE_TICKSIZE) is the size of the tick; in all modern brokers, it is a pipette.

So, if we run the following code, we will get all the information we need. Pay attention as it shows the tick value and this is not necessarily equal to the pip value. If the tick size is a pipette, then the tick value will be the value of a pipette.

//+------------------------------------------------------------------+
//| Script program start function                                    |
//+------------------------------------------------------------------+
void OnStart()
  {
   // We get all the values and perform some conversion to strings to make them readable.
   string TickValue = DoubleToStr(MarketInfo(Symbol(), MODE_TICKVALUE), 4);
   string TickSize = DoubleToStr(MarketInfo(Symbol(), MODE_TICKSIZE), 5);
   string LotSize = MarketInfo(Symbol(), MODE_LOTSIZE);

   // We print the values.
   Print("The Tick value for the currency ", Symbol(), 
   " is ", TickValue, 
   " for a default lot of ", LotSize, 
   " units and the tick size is ", TickSize);
  }
//+------------------------------------------------------------------+

Conclusion

Understanding the concepts of a pip and a pipette is required if you want to trade Forex. You will need to understand the meaning, the common jargon, and the ways to calculate pip value.

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