If you're a beginner in forex trading, you've likely heard the term "Pip." It is one of the fundamental concepts in the forex market, but beginners often don’t fully understand it. Understanding the definition of a Pip, how to calculate it, and how it impacts your profits and losses is crucial to becoming a successful trader. In this guide, we will go over everything you need to know about Pips and how to apply them in your trading strategy.
1. What is a Pip?
In forex trading, a Pip stands for Percentage in Point or Price Interest Point. It is the smallest unit of price movement in a currency pair. In most currency pairs, the precision of a Pip is calculated to four decimal places. This means 1 Pip equals a price change of 0.0001.
For example, when EUR/USD moves from 1.1835 to 1.1836, that’s a change of 1 Pip.
However, for currency pairs involving the Japanese Yen (JPY), such as USD/JPY, the precision of a Pip is calculated to two decimal places. Therefore, 1 Pip for USD/JPY equals 0.01.
Why is This Important?
As the most basic unit of price change, the Pip helps traders accurately track market fluctuations, manage trades, and calculate profits and losses.
2. How to Calculate the Value of a Pip?
What is a Pip?
In forex trading, a Pip (Percentage in Point) is the smallest unit of exchange rate movement. The value of a Pip varies depending on the currency pair, trade size (the amount of currency being traded), and the exchange rate. Let’s break this process down simply.
Trade Size (Lot Size) is the amount of currency you’re trading. Forex trading typically measures in standard lots, mini lots, and micro lots.
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Standard Lot = 100,000 units of the base currency
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Mini Lot = 10,000 units of the base currency
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Micro Lot = 1,000 units of the base currency
For most currency pairs (e.g., EUR/USD), 1 Pip = 0.0001.
For JPY-related currency pairs (e.g., USD/JPY), 1 Pip = 0.01.
1️⃣ Standard Pip Calculation Formula
The basic formula is as follows:
Pip value = (Size of one Pip ÷ Exchange Rate) × Trade Size
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Size of one Pip: For most currency pairs, it’s 0.0001; for JPY pairs, it’s 0.01
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Exchange Rate: The rate at which the trade is executed
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Trade Size: The amount in units (e.g., 1 standard lot = 100,000 units)
2️⃣ Basic Case One: Account Currency is USD, Trading Non-Yen Currency Pairs (e.g., EUR/USD)
Example:
Trading 1 standard lot of EUR/USD with an exchange rate of 1.1000
Pip value = (0.0001 ÷ 1.1000) × 100,000 = $9.09
But since EUR/USD has USD as the quote currency, the Pip value ≈ $10, which is fixed.
✅ Generally:
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Standard lot (100,000 units): 1 Pip ≈ $10
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Mini lot (10,000 units): 1 Pip ≈ $1
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Micro lot (1,000 units): 1 Pip ≈ $0.10
3️⃣ Basic Case Two: Account Currency is USD, Trading Yen Currency Pairs (e.g., USD/JPY)
Since JPY currency pairs use two decimal places, the Pip size is 0.01.
Example:
Trading 1 standard lot of USD/JPY with an exchange rate of 130.00
Pip value = (0.01 ÷ 130.00) × 100,000 = $7.69
⚠️ Pip value for JPY-related pairs is lower than $10 and varies with exchange rate fluctuations.
4️⃣ Case Three: Account Currency is Non-USD (e.g., EUR, GBP, AUD)
When the account currency is not USD, even if the traded currency pair includes USD, the Pip value must be converted to the account currency using the exchange rate.
Example:
Account currency is EUR, trading GBP/USD, 1 standard lot
Pip value (in USD) = $10
Assuming the EUR/USD exchange rate is 1.1000,
The Pip value (in EUR) = $10 ÷ 1.1000 ≈ €9.09
➕ Derived formula:
Pip value (Account Currency) = Pip value (Quote Currency) ÷ Exchange rate (Account Currency/Quote Currency)
📌 Note:
If the account currency and the quote currency in the pair match (e.g., account is GBP, trading GBP/USD), no conversion is needed, just refer to the standard value.
If the account currency is not involved in the currency pair, conversion using the third exchange rate is required.
5️⃣ Case Four: USD is in the Front of the Currency Pair (e.g., USD/CHF, USD/CAD)
When USD is in the front of the pair, the Pip value is not fixed at $10 and must be calculated using the formula.
Example:
Trading 1 standard lot of USD/CAD with an exchange rate of 1.3500
Pip value = (0.0001 ÷ 1.3500) × 100,000 ≈ $7.41
📌 For such currency pairs, since the quote currency is not USD, even if your account is USD, not every Pip is worth $10.
6️⃣ Case Five: Currency Pairs with JPY in the Front (e.g., JPY/USD, JPY/EUR)
These currency pairs are less common, but some platforms or cross pairs may encounter them.
Example:
Trading 1 standard lot of JPY/USD with an exchange rate of 0.0076
Pip size = 0.01
Pip value = (0.01 ÷ 0.0076) × 100,000 ≈ $131.58
📌 Note: When the exchange rate is less than 1, it causes the Pip value to “inflate.” This is rare in actual trading but still applicable using the formula.
7️⃣ Case Six: Account Currency, Trading Currency, and Pip Units Don’t Match (Most Complex Case)
For example:
Account currency is GBP, trading EUR/JPY.
Steps:
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Calculate the Pip value for EUR/JPY in JPY units
Pip value = (0.01 ÷ EUR/JPY exchange rate) × 100,000
Assuming EUR/JPY = 140.00,
Pip value = (0.01 ÷ 140.00) × 100,000 = 7.14 JPY -
Convert 7.14 JPY to GBP (Assuming GBP/JPY = 160.00)
7.14 ÷ 160.00 = approximately 0.0446 GBP
✅ Final: Pip value ≈ 0.0446 GBP
3. How Pips Affect Profits and Losses
The value of each Pip is crucial because it directly impacts your profits and losses. Even small Pip movements, especially with high leverage or large trade volumes, can translate into significant gains or losses.
Let’s assume you decide to buy EUR/USD with a trade size of 1 standard lot (100,000 units), and the price rises from 1.1835 to 1.1901. This means the price increased by 66 Pips.
Profit Calculation:
66 Pips × $8.47 (Standard Lot Pip value) = $558.96 profit
Even a small fluctuation of 66 Pips could result in a profit of $558.96. This demonstrates the importance of understanding Pip value in trading.
On the flip side, if the price drops by 66 Pips, you would face a $558.96 loss. Therefore, although a Pip is a very small unit, it plays a crucial role in determining your profits and losses.
4. What is a Pipette?
A Pipette is 1/10th of a Pip, also known as a fractional Pip. Some platforms use Pipette in quotes, especially on platforms like MetaTrader 4 (MT4) and cTrader.
For example:
The quote for EUR/USD might be 1.18357, where 0.00007 is the Pipette (the 5th decimal place).
This allows traders to observe smaller price movements, which is particularly important in high-frequency trading or scalping strategies.
Although not every trader needs to focus on Pipettes, they are very useful for high-frequency traders who need more precise price fluctuations.
5. Real Trading Examples
Let’s look at a real-world example to better understand the value of a Pip:
Case 1: Buying 10,000 units (Mini Lot) of EUR/USD at 1.1000.
The price rises by 10 Pips to 1.1010
Profit = 10 Pips × $1 = $10
Case 2: Buying 100,000 units (Standard Lot) of EUR/USD at 1.1000.
The price rises by 10 Pips to 1.1010
Profit = 10 Pips × $10 = $100
From this example, we can see that the size of the profit or loss is closely related to the trade size.
If the price drops instead of rising, your loss will be calculated in the same way as the profit, but in the opposite direction. Therefore, understanding Pip value helps you set stop losses and take-profit levels more accurately.
6. Pip Value for Non-USD Accounts
If your trading account is denominated in a currency other than USD (such as EUR, GBP, AUD, etc.), you need to convert the Pip value into your account currency.
Example:
Assume your account is based in EUR, and you are trading GBP/USD:
You made a $100 profit from the trade.
To convert it to EUR, you would use the current USD/EUR exchange rate.
Assuming 1 USD = 0.92 EUR,
$100 × 0.92 = €92
This conversion process can impact your overall profit or loss, especially when exchange rates fluctuate. Be mindful of these conversions when trading a non-USD account.
7. How Different Platforms Display Pips
Different brokers and platforms may display Pip values slightly differently.
MetaTrader 5 (MT5) typically displays four decimal places for most currency pairs, but for JPY currency pairs, it only shows two decimal places.
cTrader provides fractional Pips (Pipette), with prices usually displayed to five decimal places, offering more precise price movements.
TradingView displays Pip values based on the price feed provided by the broker. Some platforms round the Pip value, while others display fractional Pips to provide more accurate information.
Understanding how your broker or platform displays Pip values is crucial because it can affect your understanding of price changes.
8. The Role of Pips in Risk Management: How to Precisely Control Profits and Losses
In forex trading, Pips are an indispensable tool in risk management. By understanding the value of a Pip, traders can precisely set stop-loss (SL) and take-profit (TP) levels, thereby effectively controlling the potential risks of each trade. Mastering how to manage risk through Pips not only helps avoid significant losses but also enables you to maintain consistent profits in the long term.
🔹 Why are Pips so important in risk management?
Pips are the smallest unit of price fluctuation in the forex market. They help measure the magnitude of market price movements, but they can also be used to calculate the potential risks and profits of each trade. By understanding the USD value of each Pip, traders can set stop-loss and take-profit levels more accurately, ensuring that the risk of every trade remains within a manageable range.
The core of risk management is to control the loss of each trade, ensuring that no single trade exceeds your risk tolerance. This means you need to clearly define the value of each Pip before trading and calculate the potential loss based on your stop-loss settings. This allows you to manage positions reasonably, ensuring that losses don’t exceed your predetermined risk amount.
🔹 How to Use Pips to Set Stop-Loss and Take-Profit Levels
Setting stop-loss and take-profit levels is a skill every trader must master. By setting them correctly, you can protect yourself from market volatility and prevent losses from spiraling. Pips play a critical role in this process.
Example: How to Use Pips to Set Stop-Loss and Take-Profit
Let’s assume you have an account balance of $5,000 and you decide to risk 2% per trade. First, we need to calculate the amount of risk for each trade:
Risk per trade = 2% × $5,000 = $100
Now, you need to set a stop-loss (SL) to limit your loss, and calculate the trade size based on this stop-loss. Suppose you set a 30 Pip stop-loss, meaning you will close the trade if the price moves 30 Pips against you to prevent further losses.
Next, we calculate the risk value per Pip. This value depends on the currency pair you’re trading and the lot size you’re using. For example, if you're trading EUR/USD with a Mini Lot (10,000 units), the value per Pip is approximately $0.10.
However, for most traders, the most common calculation is based on a Standard Lot (100,000 units). For a Standard Lot, the value per Pip for EUR/USD is approximately $10. If you're using a Mini Lot, the value per Pip is around $1. Here are the calculation formulas for different lot sizes:
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Standard Lot (100,000 units): $10 per Pip
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Mini Lot (10,000 units): $1 per Pip
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Micro Lot (1,000 units): $0.10 per Pip
In this example, you chose a Mini Lot, so the risk value per Pip is approximately $1. Now we can use the following formula to calculate the position size:
Position size = Risk amount ÷ Risk value per Pip
Based on the data above, the position size is calculated as:
Position size = $100 ÷ $1 = 100 Mini Lots
This means that with a 30 Pip stop-loss, 100 Mini Lots is the maximum position size you can tolerate. If the price moves 30 Pips against you, your loss will be $100, which matches your pre-set risk limit.
🔹 How to Adjust Position Size Based on Pips and Risk Amount
Using the above calculation method, you can ensure that each trade's risk remains within your control. If you find that a particular pair’s Pip risk is too high, or you want to reduce risk, you can choose to reduce your position size. For example:
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If you want to limit your risk to $50 per trade, you can adjust your position size to ensure that your stop-loss doesn’t exceed $50.
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If you choose smaller lot sizes (such as a Micro Lot), the risk per Pip will be smaller, so even if the market fluctuates widely, your overall risk will be lower.
Here’s another example:
Let’s assume you have a $5,000 account and decide that your maximum risk per trade is 1% (i.e., $50). If you choose a 25 Pip stop-loss, the risk value per Pip needs to be recalculated:
Risk value per Pip = $50 ÷ 25 Pips = $2
Therefore, you need to select a position size with a risk value of $2 per Pip. You can choose a Mini Lot or a Standard Lot, depending on your risk preferences and account balance.
🔹 Advantages of Using Pips in Risk Management
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Avoid Emotional Decisions: By quantifying risk in Pips and dollars, you can make more rational decisions and avoid emotional reactions to market fluctuations.
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Precise Stop-Loss and Take-Profit: Understanding the value of each Pip allows you to set stop-loss and take-profit levels precisely, controlling trade risk. This not only helps protect your capital but also ensures that you receive the expected return when profiting.
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Flexible Position Size Adjustment: In an ever-changing market, you can adjust your position size based on the risk amount of the trade, optimizing your trading strategy and keeping your account healthy.
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Accurate Fund Management: Accurate Pip calculations help you better plan your account funds, ensuring that each trade’s risk stays within your tolerance, thus reducing the potential for significant losses.
Conclusion:
Pips play a vital role in risk management. By understanding and calculating the value of Pips, you can precisely set stop-loss and take-profit levels, avoid excessive risks, and ensure that each trade's risk doesn’t exceed your planned amount. By quantifying risk, you can trade more rationally, maintain stable capital growth, and avoid emotional fluctuations affecting your trading decisions. In the forex market, mastering Pip calculations and applications will make your trades more robust and ensure profitable outcomes.
9. The Difference Between Pip and USD Thinking: How to Fully Understand Profit and Loss
Although most traders in the forex market are accustomed to using Pip to measure market fluctuations, especially in technical analysis and short-term trading, it is crucial to understand how to convert profit and loss into USD amounts, as this directly impacts your financial situation and risk management. Mastering the difference and connection between these two concepts helps make more rational decisions in trading.
🔹 Pip-based thinking: Focus on technical analysis and short-term price fluctuations
Pip-based thinking is usually applicable in the following scenarios:
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Short-term trading and technical analysis: Forex traders, especially short-term traders (like day traders), focus more on real-time market fluctuations. They observe price changes in terms of Pip to determine entry or exit points. Pip provides a clear view of market volatility, helping traders identify price reversals, breakouts, or consolidations.
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Risk control and stop-loss setting: In short-term trading, traders often set stop-loss and take-profit orders in terms of Pip. For instance, a trader may set a stop-loss or take-profit when a currency pair moves 20 Pip. This approach relies on immediate market changes and is not directly tied to account funds.
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Quantifying market trends: By calculating market volatility, traders can decide whether to enter the market or trade within a certain price range. Thinking in Pip allows traders to capture smaller market movements and execute more precise trading strategies.
Example:
In EUR/USD, if the price rises from 1.1840 to 1.1860, that’s a 20 Pip movement. This small fluctuation may be very important for short-term traders, as their strategy depends on such movements.
🔹 USD-based thinking: Focus on account management and risk control
Unlike Pip-based thinking, USD-based thinking focuses more on converting Pip into actual profit or loss amounts. This approach is suited for long-term trading, account management, and assessing the overall impact of trades on your account. It helps traders clearly understand the relationship between profit and loss and actual account funds.
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Actual profit and loss assessment: USD-based thinking helps traders clearly understand the real profit and loss of each trade. For example, in real trading, you need to know the amount of profit or loss each Pip fluctuation generates. This will help you better calculate profit targets and maximum risk.
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Fund management: USD-based thinking is essential for fund management. By converting Pip into USD, traders can clearly understand the risk and reward of each trade, which is crucial for maintaining stable fund growth. For example, you may set a rule not to let any trade lose more than 2% of your account balance. In this case, understanding the actual impact of each Pip on your account is essential.
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Risk management: When making large-scale trades, understanding the risk of each position, especially in high-leverage environments, can help you avoid excessive risk once Pip is converted into USD. Particularly when holding both long and short positions, USD-based thinking can help you better evaluate the overall risk of the trade.
Example:
Suppose you buy 1 standard lot of EUR/USD. A 1 Pip fluctuation results in a profit or loss of around $10. If the price moves by 50 Pip, you will face a profit or loss of $500. By converting this profit and loss into USD, you can quickly assess the risk and reward of each trade.
🔹 The Advantages of Combining Both Thinking Approaches: Comprehensive Trading Analysis
Combining Pip and USD thinking allows you to fully understand the risks and rewards of trading.
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Flexibility in trading strategy: By focusing on both Pip and USD, you can emphasize market volatility (in Pip) in short-term trading while ensuring you don’t take on too much risk due to short-term price movements (in USD). This combination gives you more control when dealing with market uncertainty.
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Precision in risk management: Combining both thinking approaches helps balance short-term and long-term risks. For example, you can set stop-loss and take-profit orders in terms of Pip, but dynamically adjust your position and risk management strategy based on the USD profit or loss. If a trade exceeds your risk limits, you can reduce the position size or adjust your strategy.
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Managing account health: USD-based thinking helps you better understand the actual impact of each trade on your account, avoiding over-reliance on market fluctuations (Pip) and neglecting account fund growth. By combining both, you can more accurately calculate the risk-to-reward ratio of each trade, ensuring long-term capital growth.
How to Combine Both Approaches: Specific Practices
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Set trade goals and maximum loss: Before starting each trade, first set a maximum loss, usually based on the percentage of risk you are willing to take (e.g., 2% of your account balance). Then, based on this loss amount, calculate the maximum Pip movement you can tolerate, which helps you determine the position size.
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Calculate the actual value of each Pip: Before each trade, determine the actual impact of each Pip on your account. For example, when trading a standard lot of EUR/USD, each Pip equals $10, but for a mini lot, it equals $1. This helps you accurately assess potential profit and loss.
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Dynamic adjustment of position size and stop-loss: During the trade, if the market fluctuates significantly or your trade is at a loss, you can adjust your stop-loss and take-profit orders to ensure the position remains within your risk tolerance.
Conclusion:
Understanding the difference between Pip and USD thinking and combining them will greatly improve your understanding and control of forex trading. Pip thinking helps you capture market volatility and technical opportunities, while USD thinking ensures the long-term health of your account from an overall fund management perspective. Flexibly using both approaches in trading can make your strategies more precise and robust, leading to better trading results.
10. The Relationship Between Pip and Spread
The spread is the difference between the buy price and the sell price, usually measured in Pip.
For example:
If the buy price of EUR/USD is 1.1000 and the sell price is 1.1002, the spread is 2 Pip.
Understanding the spread is crucial as it directly affects your entry cost. Even if the price doesn’t change, the spread itself is your trading cost.
Some brokers offer zero-spread accounts.
11. The Relationship Between Pip and Leverage
Pip itself does not involve leverage, but when you use leverage, the fluctuation of Pip is amplified, which increases your profit or loss.
Example:
If you trade 1 standard lot (100,000 units) and the market moves by 50 Pips, you will earn a profit of $500.
With 10x leverage, you only need to use $10,000 as margin to control $100,000 of currency.
Although the Pip movement remains the same, leverage amplifies your profit (or loss).
Be cautious when using leverage, as it magnifies even small market fluctuations.