In forex trading, understanding pips is fundamental. A pip (percentage in point or price interest point) is the smallest price movement in a currency pair’s exchange rate. Whether you’re a beginner or an experienced trader, mastering pips is crucial for calculating profits, managing risk, and making informed trading decisions.
This detailed guide will explain what pips are, how to calculate their value, and why they matter in forex trading. We’ll also cover real-world examples, exceptions (like the Japanese yen), and how hyperinflation can impact pip relevance.
What Is a Pip in Forex Trading?
A pip represents the smallest incremental move a currency pair can make in the forex market. Most currency pairs are quoted to four decimal places, meaning a single pip equals 0.0001 (or 1/10,000th of the exchange rate).
Example:
- If the EUR/USD moves from 1.0950 to 1.0951, that’s a 1-pip increase.
- If the GBP/USD drops from 1.2750 to 1.2740, that’s a 10-pip decrease.
Exception: The Japanese Yen (JPY)
Pairs involving the Japanese yen (JPY) are quoted to two decimal places, so 1 pip = 0.01 (or 1/100th).
- If USD/JPY moves from 150.25 to 150.26, that’s a 1-pip change.
Why Are Pips Important in Forex Trading?
Pips serve three key purposes:
- Measuring Price Movements – Traders track pips to analyze trends and volatility.
- Calculating Profits & Losses – Each pip’s monetary value determines trade outcomes.
- Managing Risk – Stop-loss and take-profit levels are often set in pips.
Pips vs. Basis Points (BPS)
- Pips measure forex price changes (0.0001).
- Basis points (bps) measure interest rates and bond yields (0.01%).
How to Calculate the Value of a Pip
The monetary value of a pip depends on:
- The currency pair being traded.
- The exchange rate.
- The trade size (lot size).
Formula for Pip Value (When USD Is the Quote Currency)
If your account is in USD, and the quote currency is USD (e.g., EUR/USD):
Pip Value = (0.0001 / Exchange Rate) × Trade Size
Example:
- You trade 1 standard lot (100,000 units) of EUR/USD at 1.0800.
- Pip Value = (0.0001 / 1.0800) × 100,000 = $9.26 per pip
Formula for Pip Value (When USD Is the Base Currency)
If the base currency is USD (e.g., USD/JPY):
Pip Value = Trade Size × 0.0001 (or 0.01 for JPY pairs)
Example:
- You trade 1 standard lot (100,000 units) of USD/JPY at 150.00.
- Pip Value = 100,000 × 0.01 = ¥1,000 per pip
- Convert to USD: ¥1,000 ÷ 150.00 = $6.67 per pip
Real-World Examples of Pip Calculations
Example 1: Profiting from a EUR/USD Trade
- Buy EUR/USD at 1.0950
- Sell at 1.0970
- Price Movement: 20 pips
- Trade Size: 50,000 units (0.5 lots)
- Pip Value: (0.0001 / 1.0970) × 50,000 = $4.56 per pip
- Total Profit: 20 pips × $4.56 = $91.20
Example 2: Losing on a USD/JPY Trade
- Sell USD/JPY at 151.50
- Price rises to 151.70
- Price Movement: 20 pips against you
- Trade Size: 100,000 units (1 lot)
- Pip Value: 100,000 × 0.01 = ¥1,000 per pip
- Loss in JPY: 20 pips × ¥1,000 = ¥20,000
- Convert to USD: ¥20,000 ÷ 151.70 = $131.84 loss
What Are Pipettes? (Fractional Pips)
Some brokers quote five decimal places (e.g., EUR/USD at 1.09501). The fifth decimal is a pipette, equal to 1/10th of a pip.
- 1 pip = 0.0001
- 1 pipette = 0.00001
Why Pipettes Matter:
- Provide tighter spreads for scalpers.
- Allow more precise entry/exit points.
Extreme Cases: When Pips Lose Meaning
In hyperinflationary economies, exchange rates can become so volatile that pips become irrelevant.
Historical Example: Weimar Republic (Germany, 1923)
- Pre-WWI: 4.2 marks per USD
- November 1923: 4.2 trillion marks per USD
Modern Example: Turkish Lira (2001)
- Exchange rate hit 1.6 million lira per USD.
- Turkey redenominated the currency, removing six zeros to create the “new Turkish lira.”
- By 2021, the rate stabilized around 7.3 lira per USD.
Key Takeaways
✅ A pip is the smallest forex price change (0.0001 for most pairs, 0.01 for JPY).
✅ Pip value depends on the currency pair, exchange rate, and trade size.
✅ Profits/losses are calculated in pips before converting to account currency.
✅ Pipettes (fractional pips) allow for finer price measurements.
✅ Hyperinflation can render pips meaningless due to extreme currency devaluation.
Final Thoughts
Mastering pips is essential for every forex trader. They determine profitability, help manage risk, and provide a standardized way to measure market movements. By understanding how to calculate pip values and applying them in real trades, you can make more informed decisions and optimize your trading strategy.
Whether you’re trading EUR/USD, USD/JPY, or exotic pairs, always consider pip values, leverage, and risk management to stay ahead in the forex market.
Frequently Asked Questions (FAQs)
Q: How many pips do forex traders aim for per day?
A: Scalpers may target 5-10 pips, while swing traders aim for 50-100 pips per trade.
Q: Can you trade forex without worrying about pips?
A: No—pips are fundamental to calculating profits, losses, and risk-reward ratios.
Q: Do cryptocurrencies use pips?
A: Yes, but crypto pairs often move in larger increments (e.g., Bitcoin may move $100 per pip).
Q: How does leverage affect pip values?
A: Leverage amplifies both profits and losses per pip. A 1:100 leverage means each pip’s value is magnified 100x.