If you understand forex pricing, and if you understand what a pip is, then the relationship between the two should be obvious.
Consider this hypothetical example: You go short at 1.25000 with a TP (a pending order to take profit) at 1.24500. Your TP is hit, and you say that you earned 50 pips.
The price changed (to your advantage) as follows: 1.25000 - 1.24500 = 0.00500
Why did you refer to 0.00500 as “50 pips” ? Because you have learned that the fourth decimal place in a price (EXCEPT in yen pairs) represents 1 pip, the third decimal place represents tens of pips, the second decimal place represents hundreds of pips, etc.
In your head, you multiplied the price change in your successful short trade by 10,000 to arrive at the statement “I earned 50 pips.”
You may not have been aware that it took a multiplication by 10,000 in order to represent a price change of 0.00500 as 50 pips — but, from now on, you should be aware of that.
In any forex price (except prices in yen pairs), the fourth decimal place represents 1 pip, and one pip is 1/10,000 of a unit of quote currency. Why? Because the fourth decimal place in any decimal number represents 1/10,000 of that number.
In yen pairs, JPY is always the quote currency (there are no pairs in which JPY is the base currency). In yen pairs, the SECOND decimal place represents 1 pip, and one pip is 1/100 of a unit of JPY (the quote currency). Why? Because the second decimal place in any decimal number represents 1/100 of that number.
- So, if GBP/USD = 1.25560, the numeral 6 in the fourth decimal place represents 6 / 10,000 of one U.S. dollar. If you multiply that GBP/USD price by 10,000, you could actually say that the price of one GBP is 12,556 USD pips.
- If EUR/GBP = 0.88420, the numeral 2 in the fourth decimal place represents 4 / 10,000 of one British pound sterling. If you multiply that EUR/GBP price by 10,000, you could actually say that the price of one EUR is 8,842 GBP pips.
- And if USD/JPY = 107.840, the numeral 4 in the SECOND decimal place represents 4 / 100 of one Japanese yen. If you multiply that USD/JPY price by 100, you could actually say that the price of one USD is 10,784 JPY pips.
You are right. The writer of the lesson assumed that you know what I explained, above.
That’s not for me to say. I’m not part of Babypips, except as a simple member of this forum, like yourself. I just butt in here, from time to time, when I think I can clear up some confusion.
If you want to pursue a clarification in the Babypips lesson, you should start by posting your suggestion in the Community Feedback portion of the forum —