Credit: Original article by Equiti, accessed at https://www.equiti.com/jo-en/news/trading-ideas/what-is-a-pip-in-forex-trading/
Understanding What a Pip Is in Forex Trading
In the dynamic world of forex trading, precision matters. Traders often find themselves dealing with currency exchange rates that change quickly, and even the smallest movement can have a significant effect on their profits or losses. To measure these price changes, the forex market uses a concept known as a “pip.” Understanding what a pip is and how it functions in currency trading is key for anyone entering or currently active in the forex market.
What Is a Pip?
The term “pip” stands for “percentage in point” or “price interest point” and represents the smallest standard unit of measurement in forex trading used to express the change in value between two currencies. It is a universal unit that traders globally recognize as a measure of price movement in the currency market.
– In most currency pairs, a pip is typically the fourth decimal place, or 0.0001.
– For Japanese yen pairs, a pip is usually the second decimal place, or 0.01.
This standardized unit simplifies how traders measure price fluctuations and calculate profits or losses, regardless of the size of their trades or the pairs they are trading.
Example of Pip Calculation
Consider the EUR/USD currency pair:
– If the exchange rate changes from 1.1050 to 1.1051, this movement equals one pip.
– Similarly, if the USD/JPY changes from 110.45 to 110.46, that is also one pip.
These movements might seem small, but in forex trading — where large volumes are commonly traded — a single pip can have a substantial impact. For instance, if a trader is buying one standard lot (100,000 units) of EUR/USD, a movement of one pip would amount to a $10 change in the position’s value.
How Is Pip Value Calculated?
The value of a pip depends on several factors:
– The currency pair being traded
– The size of the trade (lot size)
– The exchange rate involved in the trade
Let’s walk through an example calculation using a standard lot size (100,000 units of the base currency) and the EUR/USD pair:
1. Standard Lot: 100,000 units
2. One pip = 0.0001 (for EUR/USD)
3. Pip Value = (0.0001 / current exchange rate) × lot size
4. Assuming an exchange rate of 1.1050:
– Pip value = (0.0001 / 1.1050) × 100,000 = $9.05 approx.
Thus, a one-pip movement in a standard lot of EUR/USD is close to $10, depending on the exchange rate.
Types of Lot Sizes and Their Corresponding Pip Values
Forex traders can trade various lot sizes, and the pip value changes according to each:
– Standard Lot (100,000 units): One pip = $10 (for most USD-quoted pairs)
– Mini Lot (10,000 units): One pip = $1
– Micro Lot (1,000 units): One pip = $0.10
– Nano Lot (100 units): One pip = $0.01
Most beginner traders start trading with micro or mini lots to manage risk while gaining experience.
Why Pips Matter
Pips provide traders with a convenient way to express the amount a currency pair moves, which is essential when calculating:
– Profit and loss
– Risk-reward ratios
– Entry and exit points in trading strategies
– Stop-loss and take-profit thresholds
By using pips, traders can focus on relative price movement, regardless of the actual currency values involved.
Spreads and Pips
A “spread” refers to the difference between the bid price and the ask price in a currency pair and is usually
Read more on EUR/USD trading.