What is a pip?
Learn about the fundamental units in forex trading.
* Trading is risky. Your capital is at risk.
Small numbers create massive market movements.
A trading pip is the smallest price move that an exchange rate can make based on standard market conventions. It stands for point in percentage.
Key takeaways
A pip measures the change in value between two currencies
Most currency pairs quote pips to the fourth decimal place
Your position size dictates the exact monetary value of a single trading pip
Pips explained
A pip is the measure of the change in the exchange rate of a currency pair. It corresponds to the fourth decimal digit in pairs like the EURUSD, and the second decimal digit in Japanese yen-based pairs.
The formula for calculating how much 1 pip is worth, per 100 000 units (or 1 lot) of the base currency is Amount of Base Currency X Pips = Amount in Quote Currency
So, for EURUSD for example, the applied formula would look like this: 1 lot (€100,000) X 0.0001 = $10. For Yen-based currency pairs, the result is a little different because the pip’s position is different. The value of 1 pip in USDJPY is 1 lot ($100,000) X 0.01 = ¥1000.
Let’s look at a practical example using a trade.
A trader buys 1.5 lots of GBPUSD at 1.3030. Once the price rises, for example to 1.3043, he decides to close his position. Now he’s made a profit of 13 pips. The formula in this case would look like this: 1.5 lots (£150,000) X 0.0013 = $195 of profit!
How to calculate the value of a trading pip
Understanding what a trading pip is only gets you so far. You must know how much that pip is actually worth in your account currency.
The monetary value of a trading pip depends on three specific factors. The currency pair you are trading. The current exchange rate. Your chosen position size.
Let us look at some practical examples to show how this calculation works in real time.
When USD is the quote currency
Many major pairs use the US dollar as the quote currency. The quote currency is the second currency listed in a pairing.
[Internal link: Read our guide to major currency pairs for beginners]
When trading a standard lot of EUR/USD, a single trading pip is always worth exactly $10. A standard lot equals 100,000 units of currency.
Here is the fundamental math. One pip is 0.0001. You multiply 0.0001 by 100,000. The result is 10.
If you buy one standard lot of EUR/USD and the price moves up by 20 forex pips, you make a $200 profit. A 20-pip drop means a $200 loss.
When the quote currency is not USD
Things change slightly when the US dollar is the base currency. The base currency is the first currency listed in the pair.
Let us look at USD/CAD. A standard lot is still 100,000 units. The pip value is initially calculated in Canadian dollars.
You multiply 100,000 by 0.0001. The value is 10 CAD.
To find your profit or loss in US dollars, you must divide that 10 CAD by the current USD/CAD exchange rate. If the exchange rate is 1.3500, your pip value is $7.40.
The Japanese Yen exception
The Japanese Yen completely ignores the standard four-decimal rule. Pairs involving the JPY are quoted to just two decimal places.
In the USD/JPY pair, a trading pip is the second decimal place. A move from 145.10 to 145.11 is a one-pip movement.
[Image Suggestion 2: A side-by-side visual comparison of a EUR/USD quote showing 4 decimal places and a USD/JPY quote showing 2 decimal places, with the pips circled.]
If you trade one standard lot of USD/JPY, the pip calculation uses 0.01 instead of 0.0001.
Multiply 100,000 by 0.01. The result is 1,000 JPY per trading pip.
You then divide 1,000 JPY by the current USD/JPY exchange rate to find the USD value. If the rate is 145.00, your pip is worth $6.89.
What is a pipette?
Financial markets require extreme precision. Many modern brokers now quote prices to five decimal places instead of four.
This fifth decimal place is a fractional pip. Traders often refer to this smaller measurement as a pipette.
A pipette is simply one-tenth of a trading pip. If EUR/USD moves from 1.10501 to 1.10502, it has moved by exactly one pipette.
This extra decimal place allows brokers to offer much tighter spreads. It gives you more accurate pricing when you enter and exit your trades.
Trading volume and pips
You control the monetary value of your trades through volume.
A standard lot means you control 100,000 units of currency. A mini lot is 10,000 units. A micro lot is 1,000 units.
When trading EUR/USD, a trading pip on a standard lot is worth $10. On a mini lot, that same pip is worth $1. On a micro lot, a pip equals $0.10.
This flexibility allows traders with smaller accounts to participate safely. You can start small and increase your trading volume as you gain more experience.
Calculating cross pairs
Cross pairs do not involve the US dollar at all. EUR/GBP and GBP/JPY are very popular examples of cross pairs.
The base calculation remains exactly the same. You just have an extra step to convert the value back into your home account currency.
Let us say your account is in USD and you trade EUR/GBP. A pip is initially calculated in British Pounds.
You must multiply the GBP pip value by the current GBP/USD exchange rate to find your exact risk in dollars.
The bottom line
You now understand the mechanics of a trading pip. You know how a point in percentage affects your bottom line. You see how different currency pairs require slightly different calculations.
Calculating pip values manually takes time. The market moves fast, and you need exact numbers instantly.
Use our free pip calculator to determine your exact position size and risk before placing your next trade.
Ready to trade? Open a free demo account today to practice calculating and trading forex pips with zero financial risk.