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What Are Pips in Forex & How Do You Use Them?

Tobi Opeyemi Amure
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what is a pip in forex

In a nutshell, a pip in forex is the smallest price move that a given exchange rate can make, typically the fourth decimal place in most currency pairs, such as 0.0001. For pairs with the Japanese Yen, a pip refers to the second decimal place, 0.01. Pips are used to measure the change in value between two currencies, helping traders to quantify profit or loss from their trades.

In online trading, knowledge reigns supreme and understanding key terms is your ticket to success.

Today, we are zooming in on one such term: pips.

You might have heard of them, but do you know what pips are in forex trading?

Pips, an abbreviation for percentage in point or price interest point, serve as the fundamental units of measurement in trading, particularly prevalent in forex and other markets.

Given its popularity in online trading, we have crafted this guide to shed light on what pips entail and how they factor into trades.

This article was reviewed by Tobi Opeyemi Amure, a trading expert and writer at Investopedia, Investing.com, and Trading.biz.

Understanding Pips

As mentioned above, a pip is a standardised unit of measurement representing the smallest price movement in a currency pair’s exchange rate.

A pip is equivalent to 0.0001 for most currency pairs, except for pairs involving the Japanese yen, where it typically represents 0.01 due to their higher exchange rate values.

Pip in forex trading.

Let’s break it down with an example. Say you are looking at the EUR/USD currency pair, representing the euro against the U.S. dollar. If the exchange rate changes from 1.2500 to 1.2501, that’s just one pip.

Seems small, right? But in trading, even these tiny changes matter a lot.

Now, here’s where it gets interesting. Pips help traders figure out their profits and losses. For instance, if a trader buys EUR/USD at 1.2500 and sells it at 1.2510, they have gained 10 pips.

Conversely, if they sell EUR/USD at 1.2500 and repurchase it at 1.2490, they have also gained 10 pips.

Simply put, pips serve as a standardised measure to quantify price movements. They enable traders to accurately assess their performance in the dynamic world of financial markets.

Calculating The Value of Pips in Forex Trading

Understanding the value of a pip in forex trading is essential for navigating the markets effectively.

Note that factors like the currency pair, exchange rate, and trade size influence the value of a pip.

You can calculate it as we illustrate below. 

Let’s consider the EUR/USD pair. When the U.S. dollar is the quote currency (second currency), as in this case, the pip is fixed at 0.0001.

So, if you’re trading 8,000 euros and the exchange rate is 1.2900, each pip movement would be worth $0.80. If the rate moves from 1.2900 to 1.2905, you have gained 5 pips, amounting to $4 profit.

On the other hand, let’s look at the USD/CAD pair.

Here, the U.S. dollar is the base currency (first currency), and the pip value involves the exchange rate.

Suppose the exchange rate is 1.3400 and the lot size is 50,000. Divide 0.0001 by 1.3400 and then multiply by a standard lot size of 50,000 units.

This gives a pip value of approximately $3.73. If the rate moves from 1.3400 to 1.3405, you have gained 5 pips, amounting to $18.65 profit.

JPY Exception

In scenarios where the Japanese yen is the quote currency (second currency) in a currency pair, such as in the USD/JPY pair.

In this case, the pip value is typically calculated differently.

Here, one pip movement is represented by 0.01 instead of the standard 0.0001 used for most other currency pairs.

Let’s illustrate this with an example:

Suppose you are trading the USD/JPY pair, and the exchange rate is 109.50. Each pip movement in this scenario would be equivalent to 0.01. So, if the exchange rate changes from 109.50 to 109.51, that would represent a movement of 1 pip.

To calculate the pip value in this scenario, you would use the same method for other currency pairs but adjust for the different pip values.

For instance, if you are trading 20,000 units of USD/JPY and the exchange rate moves from 109.50 to 109.51, you gain 1 pip, which would be equivalent to ¥200 profit (0.01 x 20,000).

How Do You Use Pips When Trading Forex?

In currency market trading, pips are used for various reasons, whether to open or close a position.

As a trader, understanding how pips are used is crucial as you will be able to make the best decisions.

See below some popular usages of pips. 

Calculating Value

Pips act as the basic unit for measuring price changes in currency pairs.

Traders use pips to determine the value of each movement in the exchange rate.

By understanding the value of pips, traders can accurately assess the potential profitability of their trades.

Determining Profit & Loses

Pips are essential elements in calculating profits and losses in forex trading.

Traders measure the difference in pips between a trade’s entry and exit prices to determine the overall gain or loss.

This allows traders to evaluate the success of their trading strategies. If they fall short in certain areas, they can easily make adjustments and try again. 

Setting Stop-Loss

Traders utilise pips to set stop-loss orders, which help limit potential losses on a trade.

By determining the maximum pips they are willing to risk, traders can set stop-loss levels to automatically exit a trade if the market moves against them beyond a certain point.

This risk management strategy helps protect traders’ capital and minimise losses.

Stop loss order chart.

Charging Spread

In forex trading, brokers often charge a spread, which is the difference between the bid and ask prices of a currency pair.

Pips are used to measure the spread, with brokers typically quoting spreads in terms of pips.

Understanding the spread allows traders to factor in transaction costs when executing trades.

Discussing Forex Trading with Peers

Pips are a common language among forex traders when discussing market movements and forex trading strategies.

By referring to changes in pips, traders can communicate more effectively and share insights about potential trading opportunities.

This shared understanding of pips fosters collaboration and learning within the forex trading community.

Analysing Market Volatility

Pips also provide valuable information about market volatility.

Higher pip movements indicate greater volatility, while lower pip movements suggest a more stable market environment.

By monitoring changes in pips, traders can adapt their forex trading strategies to various market conditions and capitalise on opportunities during periods of increased volatility.

Managing Trade Risks

Pips help traders manage risks associated with their trades.

By calculating the potential risk in pips before entering a trade, traders can determine the appropriate position size and set risk management parameters such as stop-loss and take-profit levels.

This proactive approach helps them preserve their trading funds and maintain consistency in their trading performance.

Benefits & Drawbacks of Using Pips in Currency Trading

While there are numerous benefits of using pips in currency trading, there are a few drawbacks to note.

Let’s take a look below at some of the pros and cons of using pips. 

Pros

  • Pips provide a universally recognised unit for measuring price movements, simplifying communication among traders.
  • Pips allow traders to accurately calculate profits and losses, aiding decision-making on entry and exit points.
  • They help set stop-loss and take-profit levels, limiting losses and facilitating position sizing for effective risk management.
  • They facilitate discussions on market movements and trading strategies among traders.
  • Pips offer insights into market volatility, aiding traders in adapting strategies to different market conditions.

Cons

  • Pips may not capture smaller market fluctuations, potentially limiting precision in market analysis.
  • Sole reliance on pips may overlook important price contexts, such as support/resistance levels and market trends.
  • The value of a pip can vary across currency pairs, especially with pairs involving the Japanese yen, leading to potential miscalculations.

Pip vs Pipette

We have seen many traders, especially newbies, finding it challenging to differentiate between a pip and a pipette.

While you may think they mean the same thing, they are different.

As mentioned earlier, a pip is the smallest unit of price movement in forex trading. It is represented by four decimal places for most currency pairs.

For example, if the EUR/USD moves from 1.2500 to 1.2501, that’s a one-pip movement.

Now, onto the pipette or point. This little guy is like the baby brother of the pip, representing a fractional movement in price.

While a pip is typically the fourth decimal place in most currency pairs, a pipette is one-tenth of a pip or the fifth decimal place.

Pip vs Pipette diagram.

So, if the EUR/USD moves from 1.25001 to 1.25002, that’s a one-pipette movement.

In currency pairs involving the Japanese Yen, a pipette is the third decimal point instead of the second. 

So why are pips and pipettes vital in trading?

Well, pips give us a general idea of price movements, while pipettes allow for more precise measurements, especially in volatile markets or when trading with high leverage.

This makes it easier for traders to conduct accurate price analyses, calculate profits and losses, and set stop-loss and take-profit orders in their trades.

So, next time you’re watching those price charts, watch for both pips and pipettes, as they might make all the difference in your trading strategy.

What Is Spread in Forex Trading?

In forex/currency trading, spread refers to the difference between the bid price and the ask price of a currency pair.

Think of it as the cost of entering a trade.

The bid price is the price at which you can sell a currency pair, while the ask price is the price at which you can buy it.

Diagram showing what the spread is in forex trading.

Note that spread is always measured in pips.

For instance, if the EUR/USD pair has a bid price of 1.2500 and an ask price of 1.2502, the spread would be 2 pips.

Spreads can also be expressed in pipettes, especially for currency pairs with tighter spreads or in fast-moving markets.

Overall, spreads directly affect your trading costs. The wider the spread, the more you must pay to enter a trade.

And since spreads are measured in pips/pipettes, understanding how they work can help you make more informed decisions about when to enter or exit a trade.

Final Thoughts

Now that you have a solid understanding of what pips are and how they are used in forex trading, it’s essential to take your knowledge a step further.

Ensure you have a good understanding of the currencies you are investing in to maximise your potential.

Also, be familiar with the economic fundamentals, geopolitical factors, and central bank policies of the currencies you are trading for valuable insights into market movements.

Most importantly, identify a suitable forex broker you can afford so it will be easier for you to budget.

By staying updated with market developments and employing continuous learning, you will soon start reaping the benefits.

FAQs

How much is 1 pip in forex?

The value of 1 pip in forex depends on the currency pair being traded and the lot size. In general, for standard lots, 1 pip is typically worth $10 in major currency pairs. However, the value can vary based on the specific currency pair and lot size being traded. It’s important to calculate the pip value accurately to manage risk and make informed trading decisions.

Can you make 20 pips a day in forex?

Making 20 pips a day in forex is achievable and has been a target for many traders. However, it’s important to note that the ability to consistently achieve this target depends on various factors, including market conditions, trading strategy, risk management, and individual trading skills. While some traders may consistently make 20 pips a day, it may not be realistic or attainable for everyone. It’s crucial to focus on developing a sound trading plan and adapting strategies to market conditions rather than fixating on a specific pip target.

How many pips a day do forex traders make?

The number of pips forex traders make per day varies greatly and is influenced by individual trading styles, strategies, and market conditions. Some traders may aim for a few pips per day, while others may target larger moves. It’s important to understand that consistency and profitability in forex trading depend on various factors, including risk management, market analysis, and trading discipline. Successful traders focus on achieving consistent, sustainable profits rather than fixating on a specific number of pips per day.

How many pips should you risk?

The number of pips you should risk depends on your trading strategy, risk tolerance, and the size of your trading account. It’s commonly advised to risk a small percentage of your account on a single trade, typically between 1% to 2%. This means calculating the pip value in relation to your position size and the stop-loss order to ensure you do not exceed the recommended account risk percentage.

How to calculate forex pips in CFDs?

To calculate forex pips in CFDs, identify the currency pair being traded and note the change in value of the pair. For most pairs, a pip is the fourth decimal place of the price change, while for pairs involving the Japanese Yen, it is the second decimal place. Multiply the pip change by the size of your trade (in units) to find the total pip movement. For pairs not involving the yen, move the decimal point four places to the right to calculate the pip value; for yen pairs, move it two places.

How to calculate forex pips in spread bets?

To calculate forex pips in spread bets, first identify the currency pair and the price movement. A pip is generally the fourth decimal point for most currency pairs, and the second decimal point for pairs involving the Japanese Yen. The pip value is determined by the size of the bet per pip. Multiply the number of pips the currency pair has moved by the size of your bet per pip to calculate the total profit or loss from the spread bet.

What causes pip values to change?

Pip values change due to fluctuations in exchange rates and the size of the trade. The value of a pip varies depending on the currency pair being traded and is influenced by changes in market conditions. Additionally, the base currency of the trader’s account and the current price of the currency pair also affect the pip value, making it dynamic and subject to the constantly changing forex market.

What are pips in forex?

Pips in forex represent the smallest price move a currency pair can make, typically the fourth decimal place of the price quote for most pairs and the second decimal place for pairs involving the Japanese Yen. A pip stands for “percentage in point” and is a standard unit of measurement for changes in the exchange rate between two currencies. It allows traders to quantify gains or losses in trading activities.

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Will Fenton is the founder of Sterling Savvy. He is a personal finance expert and writes about trading, investing, budgeting, and other financial topics.

Along with his education in Economics & Finance, he has experience working in the financial services industry in London working for one of the UK’s leading financial companies, “a trustworthy and respected provider of news, education and market analysis for the everyday investor”.

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