Intro
Pips are a fundamental concept in forex trading. A pip is a unit of measurement used to measures the change in the value of a currency pair. Pips work like any other measurement system; just like you measure length in meters, you measure currency price movement in pips.
Generally, one pip movement is a change in the fourth decimal of the exchange rate.
Here are a few examples to help you understand pips:
- When the EUR/USD exchange rate changes from 1.1012 to 1.1013 we talk about a 1 pip change
- When the EUR/USD exchange rate changes from 1.1012 to 1.1023 we talk about an 11 pip change
The Japanese yen (JPY) is an exception. In JPY pairs, the pip value is the second decimal.
- When the EUR/JPY exchange rate changes from 141.38 to 141.39 we talk about a 1 pip change
- When the EUR/JPY exchange rate changes from 141.38 to 141.22 we talk about a 16 pip change.
Essence
- A pip is a unit of measurement
- Pips are used to measure the change in the exchange rate of a currency pair
- A pip’s monetary value can be calculated for any currency
- Forex traders use pips in profit and loss calculations and market movement predictions
How are pips used in the forex market?
Pips are fundamental in forex trading. Changes in the exchange rate (price) of currency pairs are measured in pips. Forex traders calculate the monetary value of pips, which means the worth of a pip in dollars for example. This is essential for profit and losses calculations when combined with trade sizes, also known as lots.
If you are thinking about diving in forex trading, make sure to check out our list of the best forex brokers in the world compiled by our team of analysts after testing each broker by opening an account and trading with real money. If you are a beginner, we recommend opening a demo account at a forex broker to get yourself familiarized with forex trading without the risk of losing money. Using a demo account is free of charge.
Calculating the value of a pip
The value of of a pip can be expressed in any currency. We are here to explain how it is done.
- If your account currency (the currency in which you have your funds in your brokerage account) and the quote currency (the second currency of the pair you trade) are the same, the monetary value of a pip is fixed at 0.0001 quote currency.
Example: if the USD is your account currency, in pairs ending in USD (such as EUR/USD, AUD/USD, etc.) one pip is worth $0.0001
- If your account currency and the quote currency (the second currency of the pair) are different, it gets slightly more complicated. In this case, you need to divide the size of a pip (0.0001) by the exchange rate.
Example: if the USD is your account currency and you are trading a pair with CAD as the quote currency (i.e. USD/CAD) at an exchange rate of 1.3433, you take the pip size (0.0001) and divide it by 1.3433. The result will be $0.00007 and this is the pip value.
If it seems complicated, fear not. You will hardly ever need to do this calculation as there are multiple online calculators that will do the job for you.
This is just to understand the fact that if you traded one unit of currency in a pair, on a one pip movement you would earn the pip’s value in the quote (second) currency. Naturally, you will never trade one unit of a currency pair, and this takes us to our next chapter.
Calculating profit and loss based on pips
If we take the pip value and combine it with our trade size, we can predict our potential profit or loss on a trade. All we need to do is calculate the pip value for the pair taking our base currency into account, and then multiply it by the trade size in currency units (not in lots). The number we get will indicate how much profit/loss we would make on a 1 pip movement.
Example:
- Let's say your account currency is USD. If you trade USD/CAD with a mini lot (0.1 lot), a one pip movement would be worth $0.00007. A mini lot is 10,000 currency units (if you want to read more about lot calculations, click here).
- Multiplying one pip’s monetary value by 10,000 equals $0.7, which is the profit/loss you would make on a pip movement.
- If your target price or take-profit level is 50 pips away from the current exchange rate (i.e. you are buying USD/CAD at 1.3433 and your target is 1.3483), you will need to multiply your profit on one pip with the distance in pips ($0.7 x 50 = 35). If the exchange rate does indeed reach 1.3483, your profit on that particular trade will be $35.
FAQ
What is a pip?
A pip is the smallest unit of measurement in forex market movements. It measures the changes in the exchange rate (price) of a given currency pair. A pip is the change in the fourth decimal of the exchange rate, except with JPY (Japanese yen) pairs where it is the second decimal.
What is a pipette?
A pipette is one-tenth of a pip, in other words the fifth decimal in the exchange rate, except with JPY pairs, where it is the third. Pipettes not play a significant role in forex trading since pips are small enough for calculations.
How much are 50 pips worth?
Calculating the value of pips depends on multiple factors. You need to take the currency pair and the base currency of your brokerage account into consideration. If you want to make profit and or loss calculations for a given forex trade, you will need to include the trade size as well into the calculation.
Further reading
- Forex trading explained
- Bid-ask spread - Learn what it is and why it is important
- Lowest Spread Forex Brokers in 2024 | BrokerChooser
- Forex trading hours
- Forex trading glossary
- Forex trading in India
- Forex lots explained: learn lot sizing and calculation in no time
- Forex trading for beginners: learn the basics
- Leverage explained: learn what it means and how it's used
- What is volatility in forex?
- Forex margin: learn how margin works and how to calculate it
- What is a currency option?
- What is a currency future?
Everything you find on BrokerChooser is based on reliable data and unbiased information. We combine our 10+ years finance experience with readers feedback. Read more about our methodology.