What are pips?
Pips are used to express the profitability of a trade or investment. In some cases it will suffice to express the profitability in a given currency, however, when we wish to compare the results of (international) traders this will get difficult.
The trade is after all quoted in a certain currency, and because the mutual exchange rates often differ it is better to view the results in pips.
How much is a pip?
The value of a pip varies greatly for different currencies. In most currency pairs a pip reflects a price change of one fourth decimal. However, there are also currencies like the Japanese yen which are quoted with only two decimal numbers: the value of a pip is different in that case.
It is pretty simple to calculate the value of a pip. Multiply the size of the position by the number of decimals, this is the profit you make when the price rises with one pip. For example: EUR / USD 100,000 * 0.0001 = $10. A pip is thus equal to ten US dollars.
What are pips: case study
At Plus500 you can try out CFD trading for free. Here you can trade Forex, indices, commodities, stocks, and more. The spread at Plus500 differs for each trading instrument and can be as low as one pip for EUR/USD and GBP/USD. If you trade one of these currency pairs with €100,000 the transaction costs are just 100,000 x 0.0001 = €10. If you understand the essence of pips you can easily calculate things like transaction costs and return on investments.
The importance of pips
Fortunately, pips are not the most important aspect of trading and are particularly useful when comparing trades with different volumes and different currencies. Most modern brokers display your profits and losses in one singular currency so you always have a clear image of your trades.