What is the term pip in trading?
In the context of trading, a pip stands for "percentage in point" or "price interest point." It is a unit of measurement used to express the change in value between two currencies. Pips are most commonly used in the foreign exchange (forex) market, where currency pairs are traded.
In forex trading, the value of a pip is usually the fourth decimal place of a currency pair, for most currency pairs. For example, if the EUR/USD currency pair is trading at 1.2000, a change of 1 pip would be equal to 0.0001. So, if the price of the currency pair increases to 1.2001, that is considered a one pip increase.
For some currency pairs, such as the Japanese Yen (JPY), the value of a pip is the second decimal place. For example, if the USD/JPY currency pair is trading at 110.00, a change of 1 pip would be equal to 0.01. So, if the price of the currency pair increases to 110.01, that is considered a one pip increase.
Pips are used as a way to measure profit and loss in forex trading, and are also used to determine the value of a trader's open position and the margin requirements for a trade. A single pip movement in the right direction can mean a significant profit for a trader, but one in the wrong direction can mean a significant loss.
Points as opposed to small points or fractional points
In the context of trading, "points" refers to a unit of measurement that is used to express the change in value of an asset. Points are similar to pips in that they are used to measure profit and loss, but they can be used in different markets, such as stock and futures markets. Points are generally used in the context of asset prices that are denominated in whole numbers.
Small points or fractional points are also used in trading, but they are different from points or pips. Small points or fractional points refer to a smaller unit of measurement that is used to express the change in value of an asset. These smaller units are often used in the context of assets that have prices that are denominated in decimal places, such as stock prices. For example, a stock might go from $50.00 to $50.01, that is considered a change of 1 small point or fractional point.
While points, pips, small points, and fractional points are all units of measurement used to express the change in value of an asset, they are used in different markets and for different types of assets. Traders should be aware of the unit of measurement used in their market and the specific asset they are trading and adjust their strategies accordingly.
What is the point value?
The point value, in the context of trading, refers to the monetary value assigned to each point or pip of an asset's price change. The point value is used to calculate the monetary value of a trader's profit or loss on a trade, and it can vary depending on the asset being traded, the size of the trade, and the leverage used.
For example, in forex trading, the point value is typically based on the size of the trade and the currency pair being traded. If a trader is trading a standard lot size of 100,000 units of currency, a one pip movement in the EUR/USD currency pair would be worth $10 (0.0001 x 100,000). If the trade size is smaller, like a mini lot of 10,000 units, the point value would be $1 (0.0001 x 10,000).
In the stock market, point value can be calculated by multiplying the per-share price of the stock by the number of shares traded. For example, if a trader buys 100 shares of stock at $50 per share, the point value would be $50. If the price of the stock increases by 1 point, the trader would have made a profit of $100.
It's important to note that point value can also be affected by the use of leverage, which can amplify both gains and losses. Traders should always keep in mind the point value of the assets they are trading and how it affects the potential profit or loss on a trade.
How to calculate pip value
The pip value is the monetary value of a single pip of an asset's price change. Calculating the pip value can help traders to determine the potential profit or loss on a trade, and to manage their risk accordingly. Here is a general formula for calculating the pip value:
Pip value = (Pip in decimal places * Trade size) / Exchange rate
Where:
Pip in decimal places is the pip value of the currency pair being traded. For most currency pairs, it is 0.0001. For the Japanese Yen, it is 0.01
Trade size is the number of units of the base currency being traded. A standard lot is 100,000 units, a mini lot is 10,000 units, and a micro lot is 1,000 units.
Exchange rate is the current market price of the currency pair being traded.
For example, if a trader is trading a standard lot of 100,000 units of the EUR/USD currency pair at an exchange rate of 1.2000, the pip value would be:
Pip value = (0.0001 * 100,000) / 1.2000 = $8.33
This means that a one pip movement in the EUR/USD currency pair would be worth $8.33.
If the trader is using a leverage of 1:50 and the trade size is 0.01 lots, the pip value would be:
Pip value = (0.0001* (0.01*100,000)) / 1.2000 = $0.83
It's important to note that the pip value can also be affected by the use of leverage, which can amplify both gains and losses. Traders should always keep in mind the pip value of the assets they are trading and how it affects the potential profit or loss on a trade.
It's also important to note that the above formula is a general formula and it may differ depending on the broker or platform you are using. Some brokers or platforms have pip calculators that can help you to calculate the pip value of your trade.