What is a Pip in Forex Trading?

What is a pip?

If you’re just getting started in forex trading, you’ve probably heard traders throwing around the term “pip” like it’s common knowledge. “I just made 50 pips on that trade!” or “The spread is 2 pips wide.”

But what exactly is a pip, and why does it matter in forex trading?

Don't worry, I’ll break it down in the simplest way possible (with just a tiny bit of math, I promise!).

What Exactly Is a Pip?

A pip (percentage in point) is the smallest unit of price movement in the forex market. In most currency pairs, it's the fourth decimal place (0.0001).

For example, if EUR/USD moves from 1.1050 to 1.1051, that tiny 0.0001 move is ONE pip.

Exception Alert!

For currency pairs that involve the Japanese yen (JPY), a pip is the second decimal place (0.01) and not the fourth.

For JPY pairs, a pip equals 0.01 (1/100) instead of 0.0001.

For example, if USD/JPY goes from 145.50 to 145.51, that's one pip.

What Is a Pipette?

If a pip is already tiny, a pipette (or fractional pip) is even tinier. It's 1/10th of a pip.

A few forex brokers employ five decimal places for greater precision. In such instances:

A pipette is the fifth decimal place. For instance, EUR/USD increasing from 1.10500 to 1.10501 = one pipette.

For JPY cross pairs, a pipette is the third decimal place (e.g., USD/JPY increasing from 145.500 to 145.501 = one pipette).

I like to think of them this way:

• 1 pip = 10 pipettes
• 1 pipette = 0.1 pip

How to Calculate Pip Value in Forex?

Now that you know what a pip is, let's talk about pip value.

Pip value refers to how much money one pip movement is worth in a trade.

The Formula for Pip Value

Traders can calculate pip value as:

Pip Value = (1 Pip/Exchange Rate )​ x Lot Size

Does it look complicated? Not to worry, I’ll break it down with some examples.

Example 1: Adeline is trading EUR/USD where USD is the quote currency

EUR/USD = 1.2500

Pip size = 0.0001

Lot size = 10,000 units (mini lot)

10,000 × 0.0001 = 1

So, 1 pip = $1 for a mini lot

If Adeline traded 100,000 units (standard lot), 1 pip = $10

During a trade, if a trader buys EUR/USD at 1.1050 and sells at 1.1070, that’s 20 pips. If they traded a mini lot, they made $20. If they traded a standard lot, they made $200.

Example 2: Dave is trading USD/JPY where JPY is the quote currency

USD/JPY = 145.50

Pip size = 0.01

Lot size = 100,000 units (standard lot)

(0.01/145.50) × 100,000 = 6.87

So, 1 pip = ¥6.87 (in yen), and Dave’s account is in USD, he’ll need to convert that amount to U.S. dollars.

How to Find Pip Value in Your Account’s Currency?

Forex is an international market, and hence traders have accounts in different currencies.

If your trading account is in British Pounds (GBP), New Zealand Dollars (NZD), or any other currency, you will convert pip value to your account currency.

Here’s the formula:

Pip Value in Your Currency = Found Pip Value × Exchange Rate

Let’s assume you found the pip value in GBP but your account is in USD, and the exchange rate is GBP/USD = 1.30

Pip Value in USD = Pip Value in GBP × 1.30

Luckily, most brokers do this for you automatically, so you don't need to do it every time.

Why Are Pips Important in Forex Trading?

Pips are crucial in Forex trading because they help:

To Help Calculate Profit and Loss

The gain or loss of every forex trade is calculated in pips. So, more pips ideally equal more money. Learn more about profit and loss in forex

To Measure Spreads

The bid-ask spread (buying vs, selling price difference) is calculated in pips. This usually means lower spreads, which lead to cheaper trading costs.

Implement Stop Loss and Take Profit Orders

Traders can determine their stop loss and take profit according to pip movement.

For example: If a trader places a 50-pip stop loss on EUR/USD, it means that when the price goes 50 pips in the wrong direction, their trade is automatically closed to reduce losses.

Learn more about stop-out levels and margin calls.

Takeaways

Pips are tiny, but in the high-speed forex market, they quickly add up.

Now that you know what a pip is and how to determine its value, you're one step closer to making better trades.

However, here are some vital details to keep in mind:

• Pip = Smallest forex price movement unit (generally 0.0001 or 0.01 for JPY pairs).
• Pipette = 1/10 of a pip (mostly used by brokers with 5 decimal places).
• The pip value is based on currency pair, lot size, and account currency.

By understanding pips, you can conveniently compute profits, losses, and trading commissions. Learn more about how to trade forex and different forex order types to optimize your strategy.