New to forex markets? You might be wondering, "What is a pip?" A 'pip' is just a standard unit for a price movement in forex. It's also the unit most used for discussing spreads, setting stop-loss distances, measuring profits and losses and more.
Pips become important in forex CFD trading as exchange rates usually move in small increments. Without having a standard unit, it's incredibly difficult to compare moves across different currency pairs or understand how a move might translate into a gain or loss on your position.
Key takeaways
In trading, a ‘pip’ is a very small price movement. Traders use pips to measure price moves and to measure profit or loss. In the foreign exchange market, a pip is the smallest move that a currency can make.
Given that most major currency pairs are priced to four decimal places, a pip in this scenario is a price movement of 0.0001.
However, some currency pairs, such as those involving the Japanese yen, are quoted to two decimal places.
The formula for calculating pips is (0.0001 × Trade size) ÷ Spot price.
Apart from measuring price movements and profit/loss, pips are also commonly used in risk management planning.
Pips can help traders work out an appropriate position size for a trade. This helps the trader ensure that they’re not taking excessive risks by trading positions that are too large.
What is a pip?
A pip is the smallest standardised price movement in a currency pair. For most forex pairs, one pip is the fourth decimal spot (or 0.0001). As an example, if EUR/USD moves from 1.1000 to 1.1001, that's a one-pip move.
You might also see pip described as “percentage in point” or “price interest point”. The wording varies, but the concept remains the same: a pip gives you an easy way to measure and communicate small changes in exchange rates.
Difference between a pip and a pipette
A pipette is one-tenth of a pip. Most trading platforms quote prices to an extra decimal place for greater precision, and that extra digit is the pipette.
For most pairs, a pip is the 4th decimal spot and a pipette is the 5th decimal spot. 1.10000 to 1.10001 is a 1-pipette move (0.1 pip).
For Japanese yen pairs, a pip is the 2nd decimal spot, and a pipette is the 3rd decimal spot. 150.200 to 150.201 is a 1-pipette move (0.1 pip).
Pipettes can be very helpful when you're looking at tight spreads or very small intraday moves, but most traders still talk about movement in full pips for planning purposes.
How pips work in forex CFD trading
Pips are the standard unit used to measure price changes in currency pairs. Once you know how many pips a pair moved, you can translate that move into profit or loss based on the size of your position.
In terms of general 'rules' around the steps to start trading forex pairs, pay attention to the following:
If you buy and the price rises, you gain pips.
If you buy and the price falls, you lose pips.
If you sell and the price drops, you gain pips.
If you sell and the price goes up, you lose pips.
Pips are particularly useful in CFDs because they provide a consistent unit of measurement, which can support planning efforts across different trades. You can, for example, break down risk and return in pip terms, such as risking 25 pips to target 50 pips, and then adjust the size of your position so that the dollar impact matches your risk appetite.
Some other things that can influence what a pip move means for your position include:
Currency pair type (most pairs versus yen pairs).
Current exchange rates, which are relevant to pip value calculations for some pairs.
Trade size (lot size, units, etc.)
Your account currency and how profit and loss are converted.
So why does any of this matter beyond the trade itself? Forex trading can offer diversification by exposing you to global markets affected by interest rates, inflation expectations, economic growth, geopolitical shifts and more. When you have a good understanding of pips, you can compare moves and risk levels across varying currency pairs with greater consistency.
How to calculate a pip value
A pip tells you how far the market moved. Pip value tells you what that movement is worth for your trade size. For many pairs quoted to four decimal places, a simplified pip value formula is:
Pip value = (0.0001 × Trade size) ÷ Spot price
Bear in mind that this formula is a general reference point only. The exact pip value could differ depending on the pair, your account currency and how your platform calculates conversion.
Exceptions for pairs like USD/JPY
For yen pairs, one pip is the second decimal place (0.01), which changes the calculation because the pip size is different. Here's what it looks like:
Pip value = (0.01 × Trade size) ÷ Spot price
Example 1
Let’s say a trader places a $100,000 long trade on USD/CAD when it is trading at 1.0548. The value of USD/CAD rises to 1.0568. In this instance, one pip is a movement of 0.0001, so the trader has made a profit of 20 pips (1.0568 – 1.0548 = 0.0020, which is the equivalent of 20 pips). The pip value in USD is (0.0001 x 100,000) / 1.0568 = $9.46. To calculate the profit or loss on the trade, we simply multiply the number of pips gained by the value of each pip. In this example, the trader made a profit of 20 x USD $9.46 = $189.20.
Example 2
Let’s say the trader places a $10,000 long trade on USD/CAD when it is trading at 1.0570. The value of USD/CAD rises to 1.0600. In this instance, one pip is a movement of 0.0001, so the trader has made a profit of 30 pips (1.0600 – 1.0570 = 0.0030, which is the equivalent of 30 pips). The pip value in USD is (0.0001 x 10,000) / 1.0600 = $0.94. In this example, the trader made a profit of 30 x USD $0.94 = $28.20.
When you're just starting out, it can be helpful to view how pairs are quoted on instrument pages and use them as a reference. We have a number of examples you can use:
If you plan on spreading out your strategy, we also have useful information on major currency pairs in forex.
Pip value in different lot sizes
Lot sizes are used as a way to describe position size in forex, with the various lot sizes being:
Micro lot: 1,000 units.
Mini lot: 10,000 units.
Standard lot: 100,000 units.
An easy way to think about it is that if you increase your position size, the pip value increases proportionally. In other words, a 10-pip move will have a bigger dollar impact on a standard lot than on a micro lot.
Pip value scales with trade size
Lot size | Units | What changes? |
Micro | 1,000 | Smaller pip value ($0.10), smaller P&L swings. |
Mini | 10,000 | Bigger pip value ($1), larger P&L swings. |
Standard | 100,000 | Bigger pip value ($10), largest P&L swings. |
Examples of pip movements in currency pairs
Pip movement in EUR/USD
For most pairs like EUR/USD, one pip is 0.0001. Here's an example:
EUR/USD moves from 1.1000 to 1.1005.
The difference is 0.0005.
That equals five pips.
If you were long EUR/USD, this would mean a five-pip move in your favour. If you were short EUR/USD, it would be a five-pip move against you.
Pip movement in USD/JPY
Because USD/JPY is quoted with pips at the second decimal place, one pip is 0.01. As an example:
USD/JPY moves from 150.20 to 150.45.
The difference is 0.25.
Because 0.01 is one pip, 0.25 equals 25 pips.
This is why yen pairs tend to look like they move in bigger decimal increments compared with other pairs, because the pip convention is different.
Pip movement in AUD/USD
AUD/USD is one of the most actively traded pairs among Australian traders. It reflects the relationship between the Australian dollar and the US dollar, and is sensitive to a wide range of drivers from RBA interest rate decisions and Australian employment data to commodity export demand and broader risk sentiment.
For AUD/USD, one pip is typically 0.0001. Below is an example:
AUD/USD moves from 0.6500 to 0.6520.
The difference is 0.0020.
That equals 20 pips.
Why pips matter for forex traders
If you're still a little unsure and wondering exactly what pips are, the most basic answer is that pips are the unit that connects price movement to your decisions. Why do they matter so much? Because they affect how you plan trades and how you control risk.
Risk management
Pips can be used to set stop-loss distances and targets for profit. As an example, a trader might set up their:
Stop-loss at 25 pips away from entry.
Take profit at 50 pips away from entry.
Using pips in this way can help you plan your trades with greater confidence and manage risk across different currency pairs, instead of just relying on arbitrary dollar amounts.
Position sizing
Pips are also important because your risk is a combination of how many pips you're willing to lose if the market moves against you, as well as the value of one pip at your chosen trade size.
In terms of how you approach things, you might want to:
Define a 'maximum risk' per trade in dollars.
Choose a stop-loss distance in pips.
Tweak the size of your trade so that a stop-loss hit matches your predefined dollar risk.
Spreads and trading costs
The spread is the difference between the buy and sell prices. If the spread is, say, 1.5 pips, then the market needs to move at least 1.5 pips in your favour to break even on the trade.
Consider this important, especially for short-term strategies, where targets can be fairly modest. In those cases, a tight spread and good pip-based planning can make a big difference.
Supporting strategy design
Pips give you a solid metric for reviewing your trades and developing trading strategies. Even if you change the position size over time, reviewing with pips can help you understand the:
Average pips gained on winning trades.
Average pips lost on losing trades.
Whether your targets and stops are realistic for the pair you're trading.
Diversification and exposure to global markets
Forex markets are influenced by a wide mix of drivers compared to most equity markets. Interest rate changes, inflation, employment reports, geopolitical developments, and more can all move currency pairs. For Australian traders, this includes domestic catalysts such as RBA cash rate decisions and local employment data, as well as offshore factors that affect the Australian dollar's value against major currencies.
If you use forex to diversify your exposure, mastering the art of pips can help you measure risk more confidently, no matter the market you're dipping into.
