What Exactly is a Pip?
PIP stands for "Percentage in Point" or "Price Interest Point." It represents the smallest price move that a given exchange rate can make based on market convention. For most currency pairs, a pip is the fourth decimal place (0.0001), while for pairs involving the Japanese Yen, it's the second decimal place (0.01).
Visual Example: EUR/USD
The highlighted digit (5) represents the pip digit
If price moves from 1.0850 to 1.0851 = 1 pip movement
Quick Reference
• Most pairs: 1 pip = 0.0001 (4th decimal place)
• JPY pairs: 1 pip = 0.01 (2nd decimal place)
• Gold (XAU/USD): 1 pip = 0.01
• Silver (XAG/USD): 1 pip = 0.001
How to Calculate Pips
Calculating pips is straightforward once you understand the decimal places. The formula depends on whether you're dealing with a standard pair or a JPY pair.
Standard Pairs (4 decimal places)
Example:
• Buy EUR/USD at 1.0850
• Sell EUR/USD at 1.0900
• Pip Movement = (1.0900 - 1.0850) × 10,000 = 50 pips profit
JPY Pairs (2 decimal places)
Example:
• Buy USD/JPY at 149.50
• Sell USD/JPY at 150.00
• Pip Movement = (150.00 - 149.50) × 100 = 50 pips profit
Practical Trading Examples
| Currency Pair | Entry Price | Exit Price | Movement | Pips | Direction |
|---|---|---|---|---|---|
| EUR/USD | 1.0850 | 1.0875 | +0.0025 | +25 | Profit (Long) |
| GBP/USD | 1.2650 | 1.2600 | -0.0050 | -50 | Loss (Long) |
| USD/JPY | 149.50 | 148.75 | -0.75 | -75 | Loss (Long) |
| EUR/JPY | 162.25 | 163.00 | +0.75 | +75 | Profit (Long) |
Understanding Pipettes (Fractional Pips)
Many brokers now quote currencies to an extra decimal place. These fractional pips are called pipettes or points. A pipette is 1/10th of a pip.
5-Decimal Pricing
Red digit = Pip (4th decimal) | Orange digit = Pipette (5th decimal)
Why Do Brokers Use Pipettes?
- Tighter Spreads: Can offer spreads like 1.2 pips instead of just 1 or 2 pips
- Better Pricing: More competitive pricing for traders
- Precise Execution: More accurate order fills
- Smaller Minimum Movement: Benefits scalpers and high-frequency traders
Pip Value Calculation
The monetary value of a pip depends on three factors: the currency pair, the trade size, and the exchange rate. Understanding pip value is crucial for position sizing and risk management.
Pip Value Formula
Pip Value = (0.0001 / Exchange Rate) × Lot Size
For JPY Quote Currency (e.g., USD/JPY):
Pip Value = (0.01 / Exchange Rate) × Lot Size
Standard Lot (100,000 units) Quick Reference:
• EUR/USD: 1 pip ≈ $10
• GBP/USD: 1 pip ≈ $10
• USD/JPY: 1 pip ≈ $6.70 (at 149.50)
• EUR/JPY: 1 pip ≈ $6.70
💡 Pro Tip
Use our Pip Value Calculator to instantly calculate pip values for any position size and currency pair.
Why Understanding Pips is Essential
1. Risk Management
Pips are the foundation of risk management. When you set a stop loss 50 pips away, you need to know exactly how much money that represents.
2. Profit Calculation
Your trading plan might target 100 pips profit. Knowing pip values helps you calculate potential returns before entering a trade.
3. Position Sizing
To risk a specific dollar amount per trade, you need to understand how many pips your stop loss is and what each pip is worth.
4. Performance Tracking
Professional traders often measure performance in pips rather than dollars, as it provides a standardized metric across different account sizes.
5. Spread Costs
Spreads are quoted in pips. Understanding pip values helps you calculate the real cost of entering and exiting trades.
Common Pip-Related Mistakes
⚠️ Mistakes to Avoid
- Confusing Pips with Pipettes: Remember, 10 pipettes = 1 pip. A 1.5 pip spread means 15 pipettes.
- Wrong JPY Calculation: JPY pairs use 0.01 as a pip, not 0.0001. This is a 100x difference!
- Ignoring Pip Value Changes: Pip values change with exchange rates. What's worth $10 today might be worth $11 tomorrow.
- Not Accounting for Lot Size: Pip value scales with position size. 1 pip on a mini lot (10,000) is 1/10th of a standard lot.
- Forgetting Cross-Currency Conversions: If your account is in EUR but you're trading GBP/JPY, pip values need currency conversion.
Quick Pip Reference Guide
Pip Values by Lot Size (USD Account)
| Lot Type | Units | EUR/USD | GBP/USD | USD/JPY* |
|---|---|---|---|---|
| Standard | 100,000 | $10.00 | $10.00 | ~$6.70 |
| Mini | 10,000 | $1.00 | $1.00 | ~$0.67 |
| Micro | 1,000 | $0.10 | $0.10 | ~$0.067 |
| Nano | 100 | $0.01 | $0.01 | ~$0.0067 |
*USD/JPY values approximate, based on exchange rate of 149.50
Next Steps
Now that you understand pips, continue building your forex foundation: