What are pips in forex trading?

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. In other words, pips help you answer questions like:

• How far did the market move from your entry?

• What does that move mean for your profit or loss at your trade size?

• How wide is the spread in pip terms?

• How many pips are you risking, and how many are you targeting?

What is a pip?

A pip is the smallest standardized 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 oscillates, 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. The vast majority of trading platforms quote prices to an extra decimal spot to show more accuracy, 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 help level the playing field in terms of your 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. Here’s a pip value formula for pairs quoted to four decimal places:

Pip value = 0.0001 × Trade size ÷ Exchange rate

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 ÷ Exchange rate

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 several examples you can use:

• Euro and US dollar exchange rate

• British pound and US dollar exchange rate

• US dollar and Japanese yen exchange rate

• US and Canada exchange rate

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 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

Examples of pips 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 USD/CAD

USD/CAD is popular among Canadian traders because it shows the relationship between the US dollar and the Canadian dollar. Everything from interest-rate expectations to macroeconomic data and commoditylinked sentiment can affect it.

For USD/CAD, one pip is typically 0.0001. Below is an example:

• USD/CAD moves from 1.3500 to 1.3520.

• 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 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. 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. 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.