What is a PIP in Forex Trading?

What is a PIP?

You will constantly see ads for "No Commission" trading - and then they promptly boast their low PIP spreads... But do you have any idea what a PIP actually is?

As Forex Trading there are no exchanges, a PIP is a fancy way of charging you an exchange fee, and saying that you don't have any commissions. Just know this - the Forex firms are not non-profit organizations, so one way or another, they are going to make their money. The best thing to know is that a PIP is their take of the money - and be aware of how they're calculated.

The below information explains how to calculate point price (PIP):
All currency pairs can be subdivided into three logical groups - pairs with direct quote (EURUSD, GBPUSD), pairs with inverse quote (USDJPY, USDCHF), and cross rates (GBPCHF, EURJPY etc.).

• The pip price for currency pairs with direct quote is calculated according to the following formula
[pip] = [lot size] × [tick size]
where [tick size] - is the smallest possible change in price, for example for USDCHF and EURUSD it's 0.0001. For currency pairs with direct quote the pip price is constant.

Example.
EURUSD. Lot size is 100,000, tick - 0.0001. [pip] = 100000 * 0.0001 = $10.00
• For currency pairs with inverse quote:
[pip] = [lot size] × [tick size] / [current quote]
For currency pairs with inverse quote the pip price varies depending on the current quote.

Example.
USDJPY. Lot size is 100,000, tick - 0.01. If current quote is 129.20, [pip] = 100000 * 0.01 / 129.20 = $7.74
• For cross rates:
[pip] = [lot size] × [tick size] × [base quote] / [current quote]
where [base quote] - the current base pair quote.

Example.
GBPCHF. The lot size is J62500; if the current quote is 2.3000 and the base GBPUSD quote is 1.4550, [pip] = 62500 * 0.0001 * 1.4550 / 2.3000 = $3.95.