In Forex market, we have different ways of representing and talking about prices and price changes. Sometimes we only talk about the dollar value. Sometimes we consider the percentages only. And sometimes, in the case of the forex market, we have totally new units of measurement altogether.
We are of course talking about pips in the forex market. If you have spent some time in this market then you have surely encountered the concept of pip. But there is more. There is also another concept known as pipette.
Both of these concepts are used to signal and symbolize price change in the forex market. But what exactly are they and what is their difference? In this article we want to answer this question and tell you how you can use pip and pipette to measure price change.
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How Are Prices Represented in the Forex Market?
To understand the notions of pip and pipette better, we first need to understand the mechanism behind pricing in the forex market. What does price mean in this market? Is it the value of one currency? Is it the value of two currencies divided by each other? Not quite.
You see, when we want to discuss prices in the forex market, we deal with pairs that are naturally made from two foreign currencies – hence the name pair.
So this means the so-called prices in the forex market are related to these pairs that we have. But is the price of the first currency or the price of the second currency? Neither actually. The way a forex pair works is that it is a way for us to compare and contrast two currencies. Therefore, when we put two foreign currencies together to form a pair, it means we are gauging the value of one pair against the value of the other one.
This is what we call price denomination. In price denomination we have one main currency that is denominated by a second currency. The technical terminology for these main and second currencies are, respectively, base and counter currency. Thus, in a currency pair we have the base currency denominated by the counter currency.
By way of an example, if we want to talk about the so-called “price” of a popular trading pair in the forex market such as GBP/USD and we see that the quoted price for it stands at 1.0912, then this is the price of the British pound denominated by the US dollar. In other words, this number means that to buy one British pound, you need to give 1.0912 US dollars.
So this is how prices are shown in the Forex market. Now that you know the basics about how prices are represented in the forex market, let’s see what the notions of pip and pipette are.
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What Is a Pip?
A pip is the most fundamental and prevalent method for tracking and evaluating price changes in the forex market. Normally, you would imagine that price changes ought to be mentioned and discussed in terms of their dollar value. But it is different in the forex market. Pips are used to measure the amount of change.
As such each pip is equal to one unit of change in the fourth decimal point of a forex pair’s price. For instance if the price of the currency pair mentioned above, i.e. GBP/USD, goes from 1.0912 to 1.0913 then we can say that the price of this pair has moved on pip.
The importance of a pip in the forex market is that prices move slowly and on a small scale in this market. This means tracking price changes in terms of their dollar value or even other currencies would just not be prudent. For instance the price of the pair GBP/USD is highly unlikely to change one dollar!
So as you can see, price changes are so small in the forex market. We do not have big changes. These are so small that we need a small unit to track them, and that is why we use pips.
Another way you can use pips is to take advantage of it as an objective way of following price changes. You see, when you only think of the price changes in terms of their dollar value, then it can have a psychological effect that is not to your advantage. Because it will push you toward emotional thinking. But if you think about changes only in terms of pips, then it is more objective and will help you make less emotional decisions.
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What Is a Pipette?
Similar to a pip, a pipette is also used to measure price changes that occur in the price of forex pairs in this market. But the difference between a pip and a pipette is that a pipette is even smaller.
So where in the case of the pips we had the change in the fourth decimal point or 1/10000, in the case of the pipette we had the price change in the fifth decimal point or 1/100000.
This means with the help of pipette you can follow and track even the smallest price changes that occur in any currency pair.
An example of a pipette would be the following:
If the price of the currency pair GBP/USD is 1.09123 and it increases to 1.09124, then we can say it has changed one pipette.
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Conclusion
Both pip and pipette are used to track price changes that occur in the forex market and the value of each forex trading pair. A pip is the change in the fourth decimal point of a pair’s price and a pipette is the change in the fifth decimal point of a pair’s price. The reason such units of measurement are so small is because price changes in the forex market are rarely substantial and mostly very small.
