The PIP or base point, as already mentioned in the previous lessons, represents the minimum amount of
variation possible for a given quotation. We could define it as the unit of measure, the lowest common denominator in Forex prices. The PIP is made up of 0.01% of a percentage point, it would be to say the hundredth part of a percentage point. If 1% is a percentage point, one pip is equal to 0.01%. Sorry for the simplicity but we assure you that specifying it is never trivial but indeed very useful. So, as an example, if interest rates on a given stock increase by 50 pips, the increase will be 0.50% equal to 0.0050 if you consider the price of the currency. Take for example our dear friend EUR/USD. If at 15.00 its value is 1.2800 and at 18.00 equal to 1.2832 the increase will have been of 32 pips. Other names with which Pips are called are: base points, bips, basis.
Pips in practice
Although the definition of pips is quite simple, what happens in the practice of trading is a little more complicated. All right, we have seen how to calculate the variation of pips between the values of the currency pairs, but when trading on Forex we must apply the logic of pips to other factors such as capitals and margins. Before proceeding, make sure you understand and remember what was said in the first part of this article. These are simple concepts but we need to make a solid foundation to build our entire path. Are you ready? All right, let’s proceed.
A) Let’s take an example considering a starting capital of 5,000 and a lever of 1:200.
b) We want to aim for the euro and then open a purchase position of a lot on the EUR/USD with 1,1171/1,1173 quotation.
c) To buy a quantity of 10,000 the initial margin is 0.50%, so 50. So I’ll spend only 50 euros to move 10,000.
d) The available capital therefore will be 5,000 – 50 = 4,950.
e) In case there is a variation of 10 pips, I will have to calculate the PIP value for the EUR/USD (in this case 89 cent) and apply it to the variation. So I’ll have 10 pips x 89 cent = 8.9 euros. The positive change will have been 8.9 euros.
f) At this point, if I close the position I would have 5.0008 9 euros, because the initial margin will be returned to me.
For now, the lesson we terminate here but we refer you to lesson 11 for calculating the value of pips.