What is a pip in forex trading?

As stated above, a pip is a single unit of price movement in the exchange rate of a currency pair. This price change happens at the fourth number after the decimal within the listed price.

For example, let’s say EUR/USD is trading at 1.0534, and it moves up towards 1.0535 it has moved up one pip.

Now, pip movements are the same throughout all currencies except for certain currency pairs; for instance, with JPY, when the Yen is the quoted currency, the change will happen at the second number after the decimal point.

The reason for this is that the value of the Japanese Yen is much less than those of other major currency pairs.

For example, if USD/JPY trades at 153.01 and moves up towards 153.02, it has moved up one pip.

In the forex market, currencies are always listed in pairs, with the first being the base currency and the second being the quote currency. The base currency always has a unit of one.

The amount listed under the quote currency states how much is needed to buy one unit of base currency. That amount is known as the exchange rate, and any changes, whether up or down, are measured in pips occurring at the fourth decimal place.

The only exception, as mentioned, is when JPY is the quoted currency within a pair; then, the change happens at the second number after the decimal.

When trading forex, a trader can use pips in a couple of ways; for most, it’s calculating their profits and losses after a trade. Now, the number of pips a position moves is not the exact amount of profits or losses; that will all depend on the size of the position.

So, for example, if you were to open a long (buy) position on EUR/USD at 1.0534 and it moves up 20 pips to 1.0554 in your favour, you could close your trade and take a profit. However, if it moves against you by 20 pips from 1.0534 to 1.0514 and you close the position, you’ll have to deal with a loss.

As mentioned, the exact amount you could gain or lose will depend on your position size. We’ll look at some examples later to tie everything together.

In general, a pip is worth 1/100th of one cent. However, the value of a pip will also change during the trading day because the price on the spot market is constantly changing due to a currency’s value fluctuating.

You might also want to consider other factors, such as the currency pair/s you might be trading, the size of your position, the currency you might be trading in, and the current exchange rate.

In the next section, we’ll look at some of those factors that could influence the change of a pips value in more detail.

In forex trading, positions are opened through lots. Lots are standard units of measurement to increase the value of a currency pair when trading. 

This is because price movements in the forex market are generally relatively small.

Different lot sizes will provide you with a different pip value. Now, to keep things straightforward, let’s say that for a lot size of 10,000 units, the value of a single pip will be equal to $1.

With this in mind, the value of a pip will increase or decrease depending on the size of the lot you might want to use. Such as:

• A micro lot of 1000 units will have a pip value of 10 cents.
• A mini lot of 10,000 units will have a pip value of $1.
• A standard lot of 100,000 units will have a pip value of $10.

This is just to give you a basic idea of how the value of a pip could change in correlation to the lot sizes you might want to use in your trading.

Most forex brokers will be able to provide you with a pip calculator within the platform; however, for those who don’t have that option, to calculate a pip’s value, you’d multiply the position size by the standard pip value, which is 0.0001. You’d then divide that amount by the spot price.

The formula will look like this:

(0.0001 x position size) / exchange rate = pip value

How do you calculate the value of a pip with JPY executions?

As previously mentioned, currency pairs with JPY as the quote currency will see a single pip movement occurring at the second number after the decimal point. The calculations for these pairs will be as follows:

(0.01 x position size) / exchange rate = pip value

Now, let’s look at two examples of these calculations in action, first with EUR/USD and second with USD/JPY.

Example with EUR/USD

Let’s say, for example, you’re looking to open long (buy) a position on EUR/USD trading at 1.1501 worth $40,000. To get the pip value, we’ll use the calculation mentioned above:

(0.0001 x $40,000) / 1.1501 = $3.48

The value of a single pip move will then be $3.48.

If the market moves in your predicted direction by ten pips from 1.1501 to 1.1511, you would’ve made a profit of $34.80. To calculate the profits, multiply the number of pips it moved by the value of a single pip (10 pips x $3.48 = $34.80).

However, if it moved against you by ten pips, you would’ve made a loss of $34.80; the calculations will stay the same by taking the number of pips moved against your prediction multiplied by the value of a single pip (10 x $3.48 = -$34.80).

Example with USD/JPY

Let’s say you were looking to open a long (buy) position on USD/JPY trading at 140.05 worth $40,000. We can use the formula mentioned above for JPY pairs to calculate the value of a single pip move.

(0.01 x $40,000) / 140.05 = $2.86

A single pip move for this pair will be $2.86.

Now, the trade was successful and moved in your favour by ten pips from 140.05 to 140.15, giving you a profit of $28.60. To calculate the profits, you’d multiply the number of pips the market moved in your favour by the pip value (10 x $2.86 = $28.60).

However, if the trade moved against you by ten pips from 140.05 to 139.95, you would’ve made a loss of $28.60. You’ll use the same formula for calculating losses as you would for calculating profits (10 x $2.86 = -$28.60).

We saw that a pip is the smallest movement a currency pair can make, occurring at the fourth number after the decimal point and the second number after the decimal point for pairs with JPY as the quote currency.

Now, most trading brokers have been able to provide traders with price information quoting currencies to the fifth decimal place and third decimal place for JPY pairs. These fifth decimal place pip movements are called pipettes.

Now, if a pip is worth 1/100th of one cent, a pipette is worth 1/10 of a pip.

Let’s look at an example:

• EUR/USD is trading at 1.1501 and moving towards 1.1502; that’s a one-pip move. However, now you’ll see EUR/USD trading at 1.15012, and when it moves up towards 1.15013, it has moved up one pipette.
• With USD/JPY, it’s trading at 140.01 and moves towards 140.02, moving up one pip. However, now you’ll be able to see it trading at 140.013, and when it moves towards 140.014, we can say it has moved up one pipette.

Three amounts are always present when trading currency pairs: the ask (buy) price, the bid (sell) price, and the spread. The ask price will always be slightly higher than the bid price, and the spread is the difference between these two prices.

The ask price is the price you look at when you want to open a long (buy) position, and the bid (sell) price is the one you’ll look at when you want to open a short (sell) position.

The spread, on the other hand, can be seen as the transaction cost to execute a trade and compensation that goes towards the broker.

The spread will usually only be a couple of pips, so calculating it will be easy if it isn’t present on your trading platform.

Let’s say EUR/USD has an asking price of 1.1062 and a bid price of 1.1060; the spread between these two prices will be two pips (1.1062 – 1.1060 = 2 pips).