What is a pip in CFD trading?
A pip, short for “percentage in point” or “price interest point,” is a standard unit of measurement in CFD trading. It represents the smallest price movement in a financial instrument’s exchange rate. Understanding pips is essential for calculating profits, losses, and refining trading strategies.
Understanding Pips
The size of a pip varies depending on the type of financial instrument:
Most currency pairs: A pip is the fourth decimal place (0.0001) in the price quote.
JPY currency pairs: A pip is the second decimal place (0.01).
Metals (e.g., gold): A pip is the second decimal place (0.01).
Crude oil (e.g., Brent and WTI): A pip is the second decimal place (0.01).
Indices (e.g., US500): A pip is the first decimal place (0.1).
📌 Examples:
EURUSD: If the price moves from 1.1000 to 1.1001, it has moved 1 pip.
USDJPY: If the price moves from 110.00 to 110.01, it has moved 1 pip.
XAUUSD (Gold): If the price moves from 1900.00 to 1900.01, it has moved 1 pip.
US500: If the index moves from 4000.0 to 4000.1, it has moved 1 pip.
Calculating profit and loss
The profit or loss on a trade is determined by the difference in pips between the opening and closing prices.
📌 Example:
If you buy EUR/USD at 1.1000 and sell it at 1.1010, the trade yields a 10-pip profit.
Pip value
The value of a pip depends on the lot size and the currency pair being traded. For currency pairs where USD is the quote currency (e.g., EURUSD, GBPUSD), the value of 1 pip is consistent:
1 Standard Lot (100,000 units): 1 pip = $10
1 Mini Lot (10,000 units): 1 pip = $1
1 Micro Lot (1,000 units): 1 pip = $0.10
For currency pairs where USD is the base currency (e.g., USDCHF, USDCAD), the pip value varies based on the exchange rate between the two currencies.
📈 Keep in mind that the US dollar frequently acts as the quote currency in currency pairs (e.g., EURUSD and GBPUSD). This means the exchange rate of these pairs is relative to the value of 1 USD.
📈 For these pairs, one pip will always be worth $10 when trading a 100,000-unit contract or 1 lot.
📈 For pairs where the US dollar is the base currency (e.g., USDCHF and USDCAD), the pip value depends on the current exchange rate between the two currencies.
Why understanding pips is important 🚀
Profit and loss management: Knowing the pip value helps you calculate potential profits and losses before entering a trade.
Risk assessment: Pips allow you to measure price movements and set stop loss or take profit levels with precision.
Trading efficiency: A clear understanding of pip movements enhances decision-making in volatile markets.