What Is A Tick or A Pip and How to Calculate It?
If the currency pair means the quotation of two correlated but different currencies known as pip or “percentage in point”, then a “tick” depicts to the smallest change or increment or movement in any currency pair on the FX market.
In a currency pair, the first currency is called the base currency or the transaction currency while the second currency is known as quote currency, payment currency or counter currency and they are always subjected to changes like for example; EUR/USD currency pair. For example, a change or movement from 0.8941 to 0.8942 is called one tick or pip, so pip for this is 0.0001. For AUD/USD currency pair the case is the same, one pip is 0.0001.
Below is a table for the most common or major currency pairs showing its National Amount and Its pip to USD equivalents:
- EUR/USD EUR 10,000 .0001 = $1
- USD/JPY USD 10,000 .01 = $1
- GBP/USD GBP 10,000 .0001 = $1
- USD/CHF USD 10,000 .0001 = $1
- USD/CAD USD 10,000 .0001 = $1
- AUD/USD AUD 10,000 .0001 = $1
- NZD/USD NZD 10,000 .0001 = $1
You will notice that in the table the example currencies are quoted in four decimal places, which is the most common way to quote, except for Japanese yen. Let’s take a value of USD/CHF of 1.5395 as an example, 5 the fourth place is the pip.
So, how do we arrive with these results? The formula to calculate this value is defined as: one PIP (with proper decimal placement) / currency exchange rate x National Amount
Let‘s take for example per 10,000 Euros in EUR/USD, how much in dollars is one pip movement or one tick? Taking or referring to the size that is in this case is 10,000 units of Euros as the base currency and National Amount and one pip base on the given table, we will get: (.0001/.8942) x EUR 10,000 = EUR 1.1183
Using the same example, since we want to the get the value of one pip in dollars or USD, we will need to get the product of EUR 1.1183 and the exchange rate of this currency pair, that is 0.8942 and we will get $1.00 same as in table.
If you notice, every currency pair like the USD/JPY, GBP/USD or USD/CHF one pip is always $1.00 per 10,000 currency units. This in an amazing fact and that is why pip or tick values even in futures are always the same.
This is one important term on Forex that one should know and have to understand because this will determined or using pip you will know how to calculate your profits and losses in the Forex market.