If you're new to forex trading, one of the first terms you'll encounter is "PIP." Understanding what a PIP is and how it works is fundamental to calculating your potential profits and losses. This guide will explain PIPs in simple terms with clear examples to help you master this essential forex concept.
What Is a PIP in Forex?
A PIP (Percentage in Point) is the smallest price movement a currency pair can make. It's how forex prices are quoted and how traders measure profit and loss.
Simple Definition: A PIP is typically the fourth decimal place in a currency pair's price (0.0001). For JPY pairs, it's the second decimal place (0.01).
Example of a PIP Movement
If EUR/USD moves from 1.1050 to 1.1051, that's a 1 PIP increase.
If USD/JPY moves from 110.25 to 110.26, that's a 1 PIP increase.
Why Are PIPs Important?
PIPs matter because they:
- Determine your profit and loss on each trade
- Help calculate position sizes and risk management
- Allow comparison of price movements across different currency pairs
- Standardize performance measurement across accounts
How to Calculate PIP Value
The value of a PIP depends on three factors:
- The currency pair you're trading
- The size of your trade (lot size)
- The exchange rate
Standard PIP Value Formula
Example for EUR/USD:
If trading 1 standard lot (100,000 units) at 1.1050:
Simplified PIP Values by Lot Size
Standard Lot (100,000 units): ~$10 per PIP
Mini Lot (10,000 units): ~$1 per PIP
Micro Lot (1,000 units): ~$0.10 per PIP
Nano Lot (100 units): ~$0.01 per PIP
Remember: These are approximate values for pairs where USD is the quote currency. PIP values differ when USD isn't the second currency in the pair.
PIPs for Different Currency Pairs
PIP calculation varies slightly depending on the currency pair:
1. USD as Quote Currency (Second Currency)
Examples: EUR/USD, GBP/USD, AUD/USD
- PIP = 0.0001
- Value calculated as shown above
2. USD as Base Currency (First Currency)
Examples: USD/JPY, USD/CAD, USD/CHF
- PIP = 0.01 for JPY pairs, 0.0001 for others
- Formula: PIP Value = (0.0001 × Lot Size) / Exchange Rate
3. Cross Currency Pairs (No USD)
Examples: EUR/GBP, GBP/JPY, AUD/NZD
- PIP value must be converted to your account currency
- More complex calculation required
Example: Calculating PIP Value for GBP/JPY
If trading 1 mini lot (10,000 units) at 150.50:
Then convert to your account currency if needed.
Fractional PIPs (Pipettes)
Many brokers now quote prices to a fifth decimal place (0.00001) called a "pipette" or fractional PIP:
- 1 PIP = 10 pipettes
- Allows for more precise pricing
- Doesn't significantly affect most retail traders
Example: If EUR/USD moves from 1.10505 to 1.10515, that's a 1 PIP (or 10 pipette) increase.
How PIPs Affect Your Trading
Understanding PIPs helps with:
1. Calculating Profit and Loss
If you buy EUR/USD at 1.1050 and sell at 1.1070, you made 20 PIPs. If trading 1 mini lot ($1 per PIP), that's $20 profit.
2. Setting Stop Losses
A 50 PIP stop loss on a standard lot means risking ~$500 (50 PIPs × $10 per PIP).
3. Position Sizing
Knowing PIP value helps determine how many lots to trade based on your risk tolerance.
Trading Tip: Most trading platforms automatically calculate PIP value for you, but understanding the math helps you trade more consciously.
Common PIP-Related Questions
How Many PIPs Do Forex Pairs Move Daily?
Average daily ranges (in PIPs) for major pairs:
- EUR/USD: 70-100 PIPs
- GBP/USD: 100-150 PIPs
- USD/JPY: 50-80 PIPs
- AUD/USD: 60-90 PIPs
How Many PIPs Should I Target Per Trade?
This depends on your strategy:
- Scalpers: 5-15 PIPs
- Day traders: 20-50 PIPs
- Swing traders: 50-200+ PIPs
Are PIPs the Same as Points?
In forex, PIPs and points generally mean the same thing. In other markets like stocks, points have different meanings.
