Want to jump straight to the answer? The best forex broker for most people is definitely FOREX.com or CedarFX.
If you’ve ever had a conversation with a forex trader, the word “pip” has probably come up. Most often, you’ll hear how many pips a currency has moved or how many pips the trader has gained or lost on a trade or with a particular trading strategy.
If you’re a new forex trader, this sort of conversation can run the gamut from interesting to pretty confusing. No worries. Benzinga will help smooth out your “pip” knowledge.
Contents
What is a Pip?
A pip is an acronym for “percentage in point.” It’s the smallest incremental amount of change for a currency pair, and it is not the same for all currency pairs. A change of a pip for most currency pairs is measured in four decimal points as 0.0001, but you can also find currency pairs where a change of a pip is a change of 0.01.
How Do You Use a Pip?
To show how much they’ve gained or lost on a trade, forex traders use pips. The profit you make on a trade can also be expressed as the amount of money you’ve made, but that depends a lot on the size of a trade and other factors. You can use different lot sizes in forex trading, which makes the profitabiliy of trades harder to compare. With pips, it is much easier to compare trades across the currency pairs and with different position sizes.
There are many forex trading strategies based on price movement. Some traders might decide to open a short position if the currency pair they are watching makes a sudden move lower. In this strategy, the size of the move would be defined by the number of pips the currency pair has lost over the observed time frame.
You could also measure a typical move for a currency pair by calculating the average true range (ATR) indicator. Its value is presented in pips, and it shows the average range of movement for a currency pair in the chosen period and time frame. With the ATR indicator, you can get valuable historical volatility information that can help you in setting up your risk management strategy.
Forex brokers typically don’t charge trading fees like commissions, but they do have bid-ask spreads. The bid-ask spread is the difference between the best bid price and the best ask or offer price for a currency pair. The width of this dealing spread is expressed in pips. Brokers who want to make more money per trade will increase the spread. For a very liquid currency pair like EUR/USD, the spread can be less than a pip. This is possible if you are trading with brokers that allow fractional pips.
How to Calculate the Value of a Pip
First, know that the amount of money you can gain or lose with a change of one pip in a currency pair depends on the size of your trade. The typical lot sizes available at online forex brokers are standard lots of 100,000 units, mini lots of 10,000 units, micro lots of 1,000 units and nano lots of 100 units.
The following examples of pip value calculations are for an account with the U.S. dollar as its base currency. The pip value calculation differs depending on whether the USD comes first, as in USD/JPY, or second, as in EUR/USD, in the currency pair you’re trading.
If you’re trading the USD/JPY currency pair when its exchange rate is 110.00 and use a standard lot of 100,000 USD, then a change of 1 pip or 0.01 would mean a change of 1,000 yen or $9.09 in your position’s value. For a mini lot of $10,000, a 1 pip move would mean a position value change of $0.91.
To calculate the U.S. dollar value of a pip for the USD/JPY trade, divide 0.01 by the exchange rate of the USD/JPY currency pair, which is currently 110.00. Then multiply by the position size of 100,000 USD. The math looks like this:
100,000 x (0.01/110.00) = $9.09
You can see that the exchange rate plays an important part in the calculation. Let’s see what happens if the exchange rate changes significantly. What is the value of 1 pip if the USD/JPY currency pair drops to 95? Using our formula, 100,000 x (0.01/95), the answer is $10.53. If it jumps to 130, the result changes to $7.69.
For the USD/CHF currency pair, a change of 1 pip would be a change of 0.0001. The value of a pip at the current exchange rate of 0.9200 is $10.86 for a position size of 100,000 USD.
When you trade currency pairs like GBP/USD or EUR/USD, the value of a pip or movement of 0.0001 in the exchange rate is $10 for a position size of 100,000 base currency units. To buy 100,000 euros, you need $118,000 USD at the current EUR/USD exchange rate of 1.1800. If the rate rises by 700 pips to 1.25, your 100,000 euros will be worth $125,000 for a net gain of $7,000.
Best Forex Brokers
Billing itself as the world’s 1st eco-friendly broker, CedarFX makes it easy to trade and give back to the planet. You can choose a 0% Commission Account or an Eco Account — or open multiple accounts to meet all your needs.
CedarFX offers access to a wide range of tradable securities, including stocks, futures, major and exotic forex pairs, cryptocurrencies and more. Though CedarFX could introduce a few additional educational resources, the broker remains a unique option for traders invested in giving back.
- Forex investors
- Investors interested in 0% commission or eco conscious trading
- Investors looking for 24/7 customer service
- Allows users to offset their carbon footprint
- 0% commission investing
- Offers demo account access
- 24/7 customer service available through live chat
- Eco Account Option (10 trees planted for each lot traded)
- Fast deposits/withdrawls with Bitcoin
- Limited number of educational resources for new investors
IG is a comprehensive forex broker that offers full access to the currency market and support for over 80 currency pairs. The broker only offers forex trading to its U.S.-based customers, the brokerage does it spectacularly well. Novice traders will love IG’s intuitive mobile and desktop platforms, while advanced traders will revel in the platform’s selection of indicators and charting tools. Though IG could work on its customer service and fees, the broker is an asset to new forex traders and those who prefer a more streamlined interface.
- New forex traders who are still learning the ropes
- Traders who prefer a simple, clean interface
- Forex traders who trade primarily on a tablet
- Easy-to-navigate platform is easy for beginners to master
- Mobile and tablet platforms offer full functionality of the desktop version
- Margin rates are easy to understand and affordable
- Access to over 80 currency pairs
- U.S. traders can currently only trade forex
- Customer service options are lacking
- No 2-factor authentication on mobile
FOREX.com is a one-stop shop for forex traders. With a massive range of tradable currencies, low account minimums and an impressive trading platform, FOREX.com is an excellent choice for brokers searching for a home base for their currency trading. New traders and seasoned veterans alike will love FOREX.com’s extensive education and research center that provides free, informative forex trading courses at multiple skill levels. While FOREX.com is impressive, remember that it isn’t a standard broker.
- MetaTrader 4 users
- Beginner forex traders
- Active forex traders
- Impressive, easy-to-navigate platform
- Wide range of education and research tools
- Access to over 80 currencies to buy and sell
- Leverage available up to 50:1
- Cannot buy and sell other securities (like stocks and bonds)
A fully regulated broker with a presence in Europe, South Africa, the Middle East, British Virgin Islands, Australia and Japan, Avatrade deals with mainly forex and CFDs on stocks, commodities, indexes, forex, cryptocurrencies, etc. This brokerage is headquartered in Dublin, Ireland and began offering its services in 2006. It offers multiple trading platforms and earns mainly through spreads.
- Beginners
- Advanced traders
- Traders looking for a well-diversified portfolio
- Controlled by regulatory agencies of multiple countries
- Choice offered in terms of trading platforms
- Support available in 14 languages and trading platforms in 20 languages
- Practice/demo account available for trying out
- Breadth of trading assets
- Does not accept customers from the U.S. as it isn’t regulated in the U.S.
- Transferring funds to the account may take up to five days; withdrawals could take up to 10 days
Final Thoughts
A pip is very useful as a measure of exchange rate movement for currency pairs. It allows you to compare trades in any currency pair, and a trade can be compared regardless of its trade size or the exchange rate of the currency pair involved.
Indicators based on pips like the ATR can also help you evaluate the risk involved in trading a currency pair. You’ll also get important information from the ATR about a pair’s volatility and trading range. It can be cumbersome to manually calculate the value of a pip, so most online brokers offer web-based pip calculators that simplify the process for you.
Get a Forex Pro on Your Side
FOREX.com, registered with the Commodity Futures Trading Commission (CFTC), lets you trade a wide range of forex markets plus spot metals with low pricing and fast, quality execution on every trade.
You can also tap into:
- EUR/USD as low as 0.2 with fixed $5 commissions per 100,000
- Powerful, purpose-built currency trading platforms
- Monthly cash rebates of up to $9 per million dollars traded with FOREX.com’s Active Trader Program
Learn more about FOREX.com’s low pricing and how you can get started trading with FOREX.com.
