In the world of forex trading, we often hear the word “pip.” If you’re new to trading, it can be confusing at first. But don’t worry, it’s a simple concept. Understanding pips can help you measure your trading profits, losses, and overall movement in the market.
Let’s see what pips are, why they are important and how to calculate them.
What’s the PIP?
Pip means “percentage in point” or “price interest point.” It represents the smallest standard unit of movement in a forex currency pair. For most currency pairs, the pip is the fourth decimal place (0.0001).
For example:
| If the EUR / USD pair goes from 1.1050 to 1.1051, it is a 1-pip movement. |
However, for currency pairs that include the Japanese yen (such as USD / JPY), the pip is calculated at the second decimal place (0.01).
| If the USD / JPY moves from 110.25 to 110.26, it is also a 1-pip movement. |
Why are pips important in forex.
Pips are important in forex trading because they help validate price changes in all currency pairs. Instead of saying “the market moved 0.0001,” the trader simply says “the market moved 1 pip. “
Pips also play a role in measuring profit and loss in forex trading. For example:
| If you buy EUR / USD at 1.1000 and sell it at 1.1050, you get 50 pips. |
The monetary value of these pips depends on your lot size, which we’ll cover later.
How are pips calculated?
The value of the pip depends on three factors:
| currency pair |
| Trade size (lot size) |
| account currency |
1. For the standard lot (100,000 units) – The value of each pip when trading the standard lot is $10 for most major currency pairs.
Example:
| For EUR / USD, a 1-pip movement = $10 profit or loss (assuming standard lot) |
2. For mini-lots (10,000 units) – The price of each card is $1.
3. For micro lots (1000 units) – The cost of each pip is $0.10.
If the quote currency in your pair is not the same as the currency in your account, the calculation may be slightly different. In such cases, the exchange rate is factored into the pip value.
Fractional Pips: Going Beyond the Basics
In modern trading platforms, you will notice that prices move to the fifth decimal place (0.00001) for most pairs, or to the third decimal place (0.001) for yen pairs. These small movements are called fractional pips or pipettes.
For example:
| If the EUR / USD moves from 1.10501 to 1.10502, it is a 1 point move. |
Fractional pips allow for more accurate pricing, especially useful for high-frequency traders.
How does PIPS relate to risk management?
You need to understand the pips to set your stop-loss and take-profit levels. Suppose you are risking 50 pips on a trade with a potential reward of 100 pips. This gives you a risk-to-reward ratio of 1:2, which is a favorable setup for many traders.
By knowing how much each pip is worth for the size of your trade, you can better manage your risk and determine how much capital to allocate to each trade.
Conclusion
Pips are the building blocks of Forex trading. They help traders measure market movements, measure profit or loss, and set risk parameters. Whether you’re a beginner or an experienced trader, understanding how pips work is critical to your trading success.
As you gain more experience, you’ll see that pips are just the starting point. But mastering them now lays a strong foundation for your Forex journey.
