The pip value is the price attributed to a one-pip move in a forex trade – it is often used when referencing a position’s losses or gains. The meaning of pip value can vary between currencies, but as most major currency pairs are priced to four decimal places, a pip is usually equal to the fourth figure after the decimal point. In GBP/USD, for instance, 0.0001 is one pip.
Because pips are tiny in value, forex is traded in micro lots, mini lots, and lots: 1000, 10,000 or 100,000 units of currency. Although the value of a pip isn’t that much, through leverage it can represent a significant exposure and can influence your open position considerably.
The pip value is defined by the currency pair being traded, the size of the trade and the exchange rate of the currency pair. To calculate pip value, divide one pip (usually 0.0001) by the current market value of the forex pair. Then, multiply that figure by your lot size, which is the number of base units that you are trading. This means that the value of a pip will be different between currency pairs, due to the variations in exchange rates. However, when the quote currency is the US dollar, the value of a pip is always the same – if the lot size is 100,000, the pip will equal $10.
Usually, you will not have to calculate the value of a pip yourself, as your forex broker or provider will do it for you, but it is a useful process to familiarise yourself with.