Understanding the Concept of a Pip
A pip, or “percentage in point,” is the smallest price movement in the forex market. In most currency pairs, one pip equals 0.0001. For pairs involving the Japanese yen, such as USD/JPY, one pip equals 0.01. Pips are used by traders to measure price changes, track profits, and calculate risk.
If you’re new to trading, you might want to read this complete guide to forex trading for more context.
How Do You Calculate a Pip?
Basic Formula for Pip Calculation
The pip value depends on:
- Currency pair
- Lot size (standard = 100,000 units)
- Exchange rate
- Account currency
Formula:
Pip Value = (0.0001 / Exchange Rate) × Lot SizeExample Calculation
Let’s calculate the pip value for EUR/USD at 1.1050:
Pip Value = (0.0001 / 1.1050) × 100,000 = $9.05 per pipFor JPY pairs like USD/JPY:
Pip Value = (0.01 / Exchange Rate) × Lot SizeMany automated forex trading tools handle this for you in real time.
Why Are Pips Important?
Measuring Profit and Loss
Traders use pips to track how much they’ve gained or lost on a trade.
Managing Risk and Reward
Pips help define stop-loss and take-profit levels, which are crucial for risk management. Learn more about how to manage risk in forex trading.
Understanding Market Volatility
Higher pip movement within a session signals greater volatility.
Pips, Spreads, and Slippage
Spread
The difference between the bid and ask price is measured in pips. For instance, if EUR/USD has a bid of 1.1050 and an ask of 1.1052, the spread is 2 pips.
Slippage
Slippage refers to a change in price between the time you place an order and when it is executed, also measured in pips. For more, read what is slippage in forex.
What Are Pipettes?
Definition
A pipette is one-tenth of a pip. Instead of moving 0.0001, pipettes move in 0.00001 increments. Brokers that offer fractional pip pricing allow more precise quoting.
When Are Pipettes Used?
Pipettes are commonly used in scalping where every fraction of a pip matters. Check out our comparison of scalping vs swing trading to decide which strategy fits you.
Tools for Pip Management
Forex Trading Tools
Modern platforms come with built-in pip calculators. For advanced needs, use top forex trading tools.
Expert Advisors (EAs)
If you’re using automated trading, knowing how your EA calculates pip values is key. Learn how to install an EA on MetaTrader and check out top forex EAs you can buy for under $10.
Pips in Relation to Trading Sessions
Market activity, and therefore pip movement, varies across trading sessions. Read our guide on forex trading sessions and best times to trade forex.
Final Thoughts
Understanding pips is essential whether you’re trading manually or using automated systems. It affects how you place trades, manage risk, and measure performance.
If you’re planning to use custom forex indicators or test strategies with a forex VPS, being confident in pip values will support your decisions. To fine-tune your skills, explore how to backtest a forex strategy and learn about forex signals and signal providers.
For complete readiness, make sure you understand leverage and margin and avoid common pitfalls by reviewing common forex mistakes and their solutions.
