Understanding what a pip is will make the difference between reading price moves as numbers and reading them as real gains or losses. In forex trading a “pip” is the standard unit used to measure the change in value between two currencies. It’s the small, standardized increment that traders use to describe market moves, set stops and targets, compare spreads, and calculate the dollar (or account‑currency) value of a position.
The basic meaning of a pip
“Pip” is short for “percentage in point” or sometimes “price interest point.” For most currency pairs a pip equals 0.0001 of the quoted price — that is, a movement in the fourth decimal place. If EUR/USD moves from 1.1600 to 1.1601, that is a one‑pip change. Saying “EUR/USD moved 10 pips” is a compact way to describe a 0.0010 change in the exchange rate.
There are exceptions. Pairs that involve the Japanese yen are normally quoted to two decimal places, so one pip for USD/JPY is 0.01 (a movement from 110.12 to 110.13 is one pip). Modern electronic platforms often show an extra decimal place to display fractional pips (sometimes called pipettes), which represent one‑tenth of a pip.
How pips appear on price quotes
On most trading screens you’ll see prices to four or five decimal places for major pairs and two or three decimal places for yen pairs. The digit that corresponds to a pip is the last “standard” digit: the fourth digit on EUR/USD or the second digit on USD/JPY. Brokers that display a fifth (or third for yen pairs) decimal are showing pipettes — useful for tighter pricing and smaller position calculations.
Why pips matter to traders
Pips are the lingua franca of forex. Traders refer to spreads, stop losses, profit targets and historical moves in pips because it’s a consistent, pair‑agnostic way to measure change. When you see a spread quoted as “2 pips” you know roughly how much you must overcome for a trade to reach break‑even, regardless of whether the pair is EUR/USD or AUD/USD. Likewise, when planning risk you typically think in pips: “I will place a stop 50 pips away,” then convert that pip distance into a monetary amount to size the position.
Calculating the monetary value of a pip
A pip itself is a price increment, not a cash value. The monetary value of one pip depends on three things: the currency pair, the size of your position (lot size), and the currency in which your trading account is denominated.
A simple rule for a USD‑denominated account and a pair where USD is the quote (second) currency — for example EUR/USD — is:
Value per pip = Lot size × 0.0001
So for a standard lot (100,000 units) in EUR/USD one pip is:
100,000 × 0.0001 = $10 per pip.
For a mini lot (10,000 units) that same pip would be $1, and for a micro lot (1,000 units) it would be $0.10.
When USD is the base currency (for example USD/CAD) or your account is denominated in a currency different from the quote currency, you may need to divide or convert using the current exchange rate to express pip value in your account currency. For yen pairs the calculation uses 0.01 instead of 0.0001 because of the two‑decimal quoting convention.
Worked example: pips to profit
Imagine you buy 1 standard lot of EUR/USD at 1.1600 and close the trade at 1.1650. The market moved 50 pips in your favour (1.1650 − 1.1600 = 0.0050). At $10 per pip for a standard lot, your nominal profit before commissions, financing or slippage is 50 × $10 = $500.
If instead you traded a mini lot, the same 50‑pip move would be worth 50 × $1 = $50.
Fractional pips (pipettes)
Brokers often display a fifth decimal (or third for yen pairs). That extra digit measures tenths of a pip — a pipette. If EUR/USD moves from 1.16005 to 1.16015, that is a 1 pip (0.00010) change, or 10 pipettes. Pipettes give more precision and can matter when you trade very small stop sizes or when spreads are very tight.
Using pips in trade planning and risk management
Traders use pips to set stop‑loss and take‑profit orders and to size positions so that a given pip distance equals an acceptable monetary risk. For example, if your account size is $5,000 and you decide you will risk 1% ($50) on a trade with a 25‑pip stop, you need a pip value of $2 per pip. That pip value tells you the appropriate lot size to use. Brokers and many trading tools provide pip‑value and position‑size calculators to do this arithmetic automatically, but the underlying logic is always the same: convert pip distance to dollars, compare with allowed risk, and adjust position size accordingly.
Practical caveats and things to watch for
Pip definitions are standard but practical pip values can change. The pip monetary value varies with exchange rates, so the dollar value of pips for pairs that don’t have USD as the quote currency will move as markets move. Spreads widen during news or low‑liquidity periods, which affects the cost in pips to enter a trade. Execution issues such as slippage or partial fills change realised results compared to nominal pip calculations. Different brokers may label or display decimals differently, so confirm whether the platform shows pip or pipette digits and how it reports spread and commission.
Most importantly, trading foreign exchange carries significant risk. Losses can exceed deposits if using leverage, and nothing here is personalised advice. Consider practicing on a demo account, read your broker’s contract specifications, and use proper risk management.
Key Takeaways
- A pip is the standard smallest price move in forex — usually 0.0001 for most pairs, 0.01 for yen pairs; pipettes are one‑tenth of a pip.
- Traders use pips to describe spreads, set stops/targets and calculate profit or loss; the cash value of a pip depends on lot size and the currencies involved.
- Converting pip distances into monetary risk is essential for position sizing; calculators and platform tools can automate this but understanding the math helps avoid mistakes.
- Trading carries risk; manage position size, be aware of spread changes and execution issues, and do not take this as personalised advice.
References
- https://www.ig.com/en/glossary-trading-terms/pip-definition
- https://www.investopedia.com/terms/p/pip.asp
- https://en.wikipedia.org/wiki/Percentage_in_point
- https://corporatefinanceinstitute.com/resources/foreign-exchange/pip-forex/
- https://www.oanda.com/us-en/learn/introduction-to-leverage-trading/what-is-a-pip/
- https://www.axi.com/int/blog/education/forex/pips-pipettes
- https://www.babypips.com/learn/forex/pips-and-pipettes