What is a Pip in Forex Trading?
If you are interested in Forex and regularly read analysis or commentary pieces, you are likely to have come across mentions of the term ‘pip’ or ‘pips’. This is because a pip is a very common term in Forex trading. But what is a pip? This article will address this question, explaining the meaning of a pip, and how useful a concept it is when trading Forex.
Pip Definition
A pip is an incremental price movement, with a specific value dependent on the market in question. Put simply, it is a standard unit for measuring how much an exchange rate has changed in value.
Originally, a pip was effectively the smallest increment in which an FX price would move, though with the advent of more precise methods of pricing, this original definition no longer holds true. Traditionally, FX prices were quoted to a set number of decimal places – most commonly, four decimal places – and, originally, a pip was a one-point movement in the final decimal place quoted.
Many brokers now quote Forex prices to an extra decimal place; however, this means that a pip is frequently no longer the final decimal place within a quote. It remains a standardised value across all brokers and platforms, making it very useful as a measure that allows traders to always communicate in the same terms without confusion. Without such a specific unit, there would be a risk of comparing apples to oranges, when talking in generic terms such as points or ticks.
How Much is a Pip?
For most currency pairs, one pip is a movement in the fourth decimal place. The most notable exceptions are those FX pairs involving the Japanese Yen. For pairs involving the JPY, one pip is a movement in the second decimal place.The pip points table further below shows Forex pips rates for some common currency pairs.
Multiplying your position size by one pip will allow you to answer the question of how much a pip is worth. Let’s say you are aiming to trade the EUR/USD currency pair, and you decide to purchase one lot. One lot is worth 100,000 EUR. One pip is 0.0001 for EUR/USD. The currency value of one pip for one lot is therefore 100,000 x 0.0001 = $10. Let’s say you buy the EUR/USD at 1.16650, and later close your position by selling one lot at 1.16660. The difference between the two is:
- 1.16660 – 1.16650 = 0.00010
In other words, the difference is 1 pip. You will have made $10. If we work through these sample numbers from a different angle, we can further illustrate what a pip is in trading.
| Forex Pair | One pip | Sample price | Lot size | Forex pip value (1 lot) |
| EURUSD | 0.0001 | 1.16671 | EUR 100,000 | USD 10 |
| GBPUSD | 0.0001 | 1.31114 | GBP 100,000 | USD 10 |
| USDJPY | 0.01 | 113.553 | USD 100,000 | JPY 1000 |
| USDCAD | 0.0001 | 1.27326 | USD 100,000 | CAD 10 |
| USDCHF | 0.0001 | 0.99543 | USD 100,000 | CHF 10 |
| AUDUSD | 0.0001 | 0.76260 | AUD 100,000 | USD 10 |
| NZDUSD | 0.0001 | 0.69008 | NZD 100,000 | USD 10 |
Trading Pips Explained
Let’s say that you opened your position at 1.16650, and you bought one contract. This is equivalent to buying 100,000 EUR. Notionally, you are selling dollars to purchase Euros. The value of the Dollars that you are notionally selling is naturally dictated by the exchange rate.
For example:
- EUR 100,000 x 1.16650 : USD/EUR = USD 116,650
- You closed your position by selling one contract at 1.16660. Notionally, you are selling the Euros and buying the Dollars.
- EUR 100,000 x 1.16660 : USD/EUR = USD 116,660
- That means that you originally sold $166,650, and ended up with $166,660, for a profit of $10. From this, we can see that a one-pip movement in your favour made you $10.
In fact, this trading pips value is consistent across all FX pairs that are quoted to four decimal places – a movement of one pip in the exchange rate is worth 10 units of the quote currency (i.e. the second-named currency) if you are dealing in a size of one lot (which is always 100,000 units of the base currency – the first-named currency). A move of 10 pips is worth 100 units of the quote currency. A move of 100 pips is worth 1,000 units of the quote currency, and so on.
What About Currencies That Are Not Quoted to Four Decimal Places?
The most notable currency here is the Japanese Yen. Currency pairs involving the yen were traditionally quoted to two decimal places, and FX pips for such pairs are therefore governed by the second decimal place. So let’s take a look at how to calculate pips with the USD/JPY currency pair: If you sell one lot of the USD/JPY, a downward move of one FX pip in the price will enable you to earn 1,000 yen.
Let’s work through an example to see why:
The USD/JPY Currency Pip Example
- Suppose that you sell two lots of the USD/JPY currency pair at 113.607. One lot of the USD/JPY is worth 100,000 USD. You are therefore selling 2 x 100,000 USD = USD 200,000 in order to purchase: 2 x 100,000 x 113.607 = 22,721,400 JPY.
- Let’s say the price moves against you and you decide to cut your losses. You close out at 114.107. One pip for the USD/JPY is a movement in the second decimal place. The price has moved against you by 0.50, which is therefore 50 pips.
- You proceeded to close your position by purchasing 2 lots of the USD/JPY at 114.107. To buy back $200,000 of USD at this rate costs: 2 x 100,000 x 114.107 = JPY 22,821,400.
- This is 100,000 JPY more than your original sale of Dollars gave you, so you have a shortfall of 100,000 JPY.
- Losing 100,000 JPY for a 50-pip movement means that for each pip you lost: 100,000/50 = 2,000 JPY. Since you sold 2 lots, this is a pip value of 1,000 per lot.
If your account is denominated in a currency that is different to the quote currency, it will affect the pip value. You can use our Trading Calculator to work out pip values with ease.