What is a pip in Forex trading: Pip explained – ( Reviewed ) 2025

According to research in South Africa, a pip explained in this article is an important concept to understand as a Forex trader. You need to understand how exchange rates move, how to manage your risk well, and also how to calculate the profit or loss on a position

A pip is basically the most fundamental unit of measurement used when trading different currencies, but there is much more to it than that.

Essentially, a pip which is short for point in percentage is a measurement used to monitor small currency changes in the Forex market. When the exchange rate moves it is measured by pips

For example, $0.0001 for currency pairs in relation to the U.S Dollar, is generally referred to as 1/100^th of 1%, or one basis point.

• A Basis Point (BPS) is a common unit of measurement for interest rates and other percentages in finance. One basis point is equal to 1/100^th of 1% or 0.01% or even 0.0001.

If you have recently decided to start trading in Forex, you’ve probably heard of the term “pip” or “pips”.

Pip explained in MORE detail

A pip was originally the smallest amount in which a Forex price could move, however because of more exact measures of pricing, this is not exactly true today.

In the past Forex, prices were quoted to a set number of decimal places – usually four decimal places – and therefore a pip was a one-point movement in the final decimal that the broker quoted you.

Today a lot of brokers will quote Forex prices to an extra decimal place. But the most important thing to know is that a Pip is the standard value of measurement across all platforms and brokers.

Example of a pip

Let’s say we have a USD/EUR direct quote of 0.7747, what this means is that for every $1 USD, you can potentially purchase about 0.7747 euros.

If one-pip increases in this quote, let’s say to around 0.7748 the value of the U.S dollar will increase in relation to the euro, as $1 USD would allow you to purchase smaller amounts of euros.

So, to recap:

• A pip is the unit of measurement used to express the change in values between two currencies.

So, if EUR/USD moves from 1.1050 to 1.1051, that .0001 USD rise in value is referred to as ONE PIP and is usually the last decimal place of a price quote.

Most of the currency pairs, regarding pips, go out to 4 decimal places, however, there are exceptions – such as the Japanese yen, which goes out to two decimal places.

Such as EUR/USD, which is 0.0001, and for USD/JPY it is 0.01.

Traders usually use pips to attempt to gauge gains or losses.

What are Pipettes?

Some Forex brokers might quote currency pairs which are beyond the standard 4 and 2 decimal places to 5 and 3 decimal places.

These are referred to as fractional pips, also known as “pipettes”.

This concept allows for tighter spreads.

Essentially, a fractional pip is equivalent to around 1/10 of a pip which makes it possible for traders to view the EUR/USD currency pair with pipettes to five decimal places, while currency pairs with the Japanese yen as the quote currency get placed to three decimal places.

Forex Pairs

Once you understand pips you are better able to learn other trading concepts like the volatility of Forex pairs. This volatility is expressed in the number of pips that a pair will move in a day.

Crosses will have larger pip movements over Major Pairs during the course of the day because of relatively low liquidity. This is because there are a smaller number of sellers and buyers (low liquidity) and therefore any price changes will affect volatility.

That also explains why exotic pairs can easily move hundreds, even thousands of pips in a single day.

This volatility creates a multitude of trading opportunities for Forex traders time and again. That is why understanding pips are so important.

How do you determine pip value?

It is worth noting that the value of one pip will always be different between currency pairs because of the different exchange rates of currencies.

In order to understand the monetary value of each pip we will first need to determine:

• The currency pair which is traded
• The definite size of the trade
• The exchange rate (price quoted)

With these three factors in mind, we can understand the fluctuation of a single pip which can have a significant impact on the value of the open position.

Pip explained. Forex Pair, Price, and Size Example

What is a lot?

Forex is traded in specific amounts which are known as lots. A lot is the number of currency units you are looking to buy or sell

Calculating the actual pip value

To determine the actual value, we will need to understand three more key points:

Quote currency (CAD)

Determine the number of the quote currency (CAD) in which each pip represents – then multiply the amount of the trade by 1 pip (Value x 0.0001) = which gives you your (CAD) value.

Base currency per pip

Then, calculate the number of base currency (USD) per pip. Divide the number of (CAD) per pip from the previous formula by the closing exchange rate to find the number of USD per pip (value ÷ 1.0568) = your USD per pip.

Profit or loss on the trade

Then, determine the total profit or loss of the trade: multiply the number of pips gained, by the value of each pip in USD from the previous formula to find out the total profit/loss for the trade: 20 pips x value = your profit in USD.

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Example calculating pip value

A $350,000 trade with EUR/GBP is closed at 0.8714 after gaining 29 pips.

The number of GBP per pip: 350,000 x 0.0001 = 35

Per Pip Value: 35 ÷ 0.8714 = 40.17 EUR per pip

Trade Profit / Loss: 29 pips x 40.17 = 1,164.93 Euros

Read Why Trade Forex – An Expert View here

Calculating position size

It is important to know how pips can be used to determine the perfect position size for your trade and in so doing manage your risk.

There are 3 simple steps to follow

Step 1: Determine your risk per trade

This is your total risk you are willing to make on a single trade. This is usually a percentage of your trading account balance; most traders do not risk more than 2% of their account balance on a single trade.

So, if your trading account balance is $10,000, your risk per trade must not go over $200.

Step 2: Place your Stop Loss

After you’ve found a good trade setup, check for potential areas where you can place your Stop Loss level and express it in pips.

For example:

Step 3: Calculate your Position Size

Now we can calculate your position size.

Risk per trade: $200

Stop Loss: 40 pips

Divide your Risk per trade by your Stop Loss (200/40) = position size ($5 per pip). This is about 0.5 lots.

Major currency’s pips

Depending on how various currencies are traded, pip values vary, and most commonly you’ll find that the value of one pip is standard on most trading platforms.

Even though it is rare, it is possible for some of these platforms to record a price move in half-pip increments.

Some of the major currencies that are always traded by investors or traders include:

• The Japanese yen (JPY)
• Great British Pound (GBP)
• US Dollar (USD)
• Euro (EUR)
• Canadian Dollar (CAD)

These major currencies can essentially be paired with each other or paired with other more exotic currencies.

It’s important to consider how to calculate price movements in pips and know how it is calculated.

Let’s recap

Simple evaluation: Position size x 0.0001 = Monetary value of a pip

When opening a position of buy and the market potentially moves in your favor, every pip movement will essentially earn you $1.00 and the same is true if you sell.

If the markets are against you and your choice to buy or sell, a $1.00 will be lost per pip movement if the trend you are following is against you.

So, as we know the GBP and USD are typically quoted to the 4^th decimal place however, with fractional pip pricing, the GBP and USD are quoted to the 5^th decimal place.

Recap on fractional pips

As said before, a fractional pip is one-tenth of a pip. Fractional pips are sometimes used to get a more accurate and precise definition of fluctuations in Forex rates. A sixth digit is used to show how fractional pips interact with Forex rates.

Example while using the EUR/CHF exchange rate:

Exchange rate 1: EUR/CHF = 1.09388

Exchange rate 2: EUR/CHF = 1.09386

The difference here between the two rates is 2 factional pips or EUR/CHF 0.00002.

So, let’s say that the amount being traded was 100,000 euros, the difference of the fractional pip would come to around 2 euros.

What about currencies that are not quoted to four decimal places?

If we take a look at the Japanese yen, currency pairs involving the yen were originally quoted to two decimal places, and FX pips for these pairs are therefore placed into the second decimal place.

Let’s look at how to calculate these pips with the USD/JPY currency pair for example:

Say you sell two amounts of the USD/JPY currency pair at 113.607.

One amount of the USD/JPY is worth 100,000 USD.

You are essentially then selling 2 x 100,000 USD = USD 200,000 to purchase 2x 100,000 x 113.607 = 22,721,400 JPY.

Calculating Profit and Loss (Pips)

Let’s assume that you have a 100,000 GBP/USD position currently trading at 1.3147.

If the price moves from GBP/USD 1.3147 to 1.3162, then the position has jumped 15 pips. For 100,100 GBP/USD position, the 15-pips movement equals to around $150 (100,000 x .0015).

In order to determine if you have made a profit or a loss we are going to need to understand whether we were long or short for each trade.

What is going long or going short?

Every beginner trader should understand the basics of going long or short. It basically comes down to whether you believe the currency will go up or go down, relative to another currency.

When a trader thinks a currency will go up, they will “go long” on the underlying currency.

When a trader thinks a currency will go down, they will “go short” on the underlying currency.

Long position

With long positions, if the prices increase it will be a profit, and if the price decreases it will be a loss.

If you look at the earlier example, if the position is long GBP/USD, then it would basically be a $150 profit.

Or, if the price decreases from GBP/USD 1.3147 to 1.3127, then it will be a $200 loss or, (100,000 x -0.0020).

Short position

In terms of a short position if the price increases, it will be a loss, and if the price decreases it will be a profit.

Using the same example, if we were sitting on a short GBP/USD position and the prices increases by 15 pips, it would be a loss of $150. If the prices decreased by 20 pips, it would be a $200 profit.

Read 15 Must Know Forex Trading Signals for Beginners here

Conclusion

Most of these calculations will not have to be performed manually, almost all brokerage accounts automatically calculate the profit and losses of all your trades.

However, it is important to understand these calculations, as you will need to calculate your own profit, loss and margin while creating a structure of your trade – even before you enter the trade itself.

Margin accounts are typically used with USD and depending on how much leverage your trading account offers; you can calculate the actual margin required in order to hold a position.

If you have a leverage of 100:1, for example, you will require a margin of $1,000 to open a standard lot position of 100,000 USD/CHF.

A standard lot is the equivalent of 100,000 units of the base currency in Forex trade.

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