If you're a beginner in forex trading, you've likely heard the term "Pip." It is one of the fundamental concepts in the forex market, but beginners often don’t fully understand it. Understanding the definition of a Pip, how to calculate it, and how it impacts your profits and losses is crucial to becoming a successful trader. In this guide, we will go over everything you need to know about Pips and how to apply them in your trading strategy.
1. What is a Pip?
In forex trading, a Pip stands for Percentage in Point or Price Interest Point. It is the smallest unit of price movement in a currency pair. In most currency pairs, the precision of a Pip is calculated to four decimal places. This means 1 Pip equals a price change of 0.0001.
For example, when EUR/USD moves from 1.1835 to 1.1836, that’s a change of 1 Pip.
However, for currency pairs involving the Japanese Yen (JPY), such as USD/JPY, the precision of a Pip is calculated to two decimal places. Therefore, 1 Pip for USD/JPY equals 0.01.
Why is This Important?
As the most basic unit of price change, the Pip helps traders accurately track market fluctuations, manage trades, and calculate profits and losses.
2. How to Calculate the Value of a Pip?
What is a Pip?
In forex trading, a Pip (Percentage in Point) is the smallest unit of exchange rate movement. The value of a Pip varies depending on the currency pair, trade size (the amount of currency being traded), and the exchange rate. Let’s break this process down simply.
Trade Size (Lot Size) is the amount of currency you’re trading. Forex trading typically measures in standard lots, mini lots, and micro lots.
- Standard Lot = 100,000 units of the base currency
- Mini Lot = 10,000 units of the base currency
- Micro Lot = 1,000 units of the base currency
For most currency pairs (e.g., EUR/USD), 1 Pip = 0.0001.
For JPY-related currency pairs (e.g., USD/JPY), 1 Pip = 0.01.
Standard Pip Calculation Formula
The basic formula is as follows:
Pip value = (Size of one Pip ÷ Exchange Rate) × Trade Size
- Size of one Pip: For most currency pairs, it’s 0.0001; for JPY pairs, it’s 0.01
- Exchange Rate: The rate at which the trade is executed
- Trade Size: The amount in units (e.g., 1 standard lot = 100,000 units)
Basic Case One: Account Currency is USD, Trading Non-Yen Currency Pairs (e.g., EUR/USD)
Example:
Trading 1 standard lot of EUR/USD with an exchange rate of 1.1000
Pip value = (0.0001 ÷ 1.1000) × 100,000 = $9.09
But since EUR/USD has USD as the quote currency, the Pip value ≈ $10, which is fixed.
Generally:
- Standard lot (100,000 units): 1 Pip ≈ $10
- Mini lot (10,000 units): 1 Pip ≈ $1
- Micro lot (1,000 units): 1 Pip ≈ $0.10
Basic Case Two: Account Currency is USD, Trading Yen Currency Pairs (e.g., USD/JPY)
Since JPY currency pairs use two decimal places, the Pip size is 0.01.
Example:
Trading 1 standard lot of USD/JPY with an exchange rate of 130.00
Pip value = (0.01 ÷ 130.00) × 100,000 = $7.69
⚠️ Pip value for JPY-related pairs is lower than $10 and varies with exchange rate fluctuations.
Case Three: Account Currency is Non-USD (e.g., EUR, GBP, AUD)
When the account currency is not USD, even if the traded currency pair includes USD, the Pip value must be converted to the account currency using the exchange rate.
Example:
Account currency is EUR, trading GBP/USD, 1 standard lot
Pip value (in USD) = $10
Assuming the EUR/USD exchange rate is 1.1000,
The Pip value (in EUR) = $10 ÷ 1.1000 ≈ €9.09
Derived formula:
Pip value (Account Currency) = Pip value (Quote Currency) ÷ Exchange rate (Account Currency/Quote Currency)
Note:
If the account currency and the quote currency in the pair match (e.g., account is GBP, trading GBP/USD), no conversion is needed, just refer to the standard value.
If the account currency is not involved in the currency pair, conversion using the third exchange rate is required.
Case Four: USD is in the Front of the Currency Pair (e.g., USD/CHF, USD/CAD)
When USD is in the front of the pair, the Pip value is not fixed at $10 and must be calculated using the formula.
Example:
Trading 1 standard lot of USD/CAD with an exchange rate of 1.3500
Pip value = (0.0001 ÷ 1.3500) × 100,000 ≈ $7.41
For such currency pairs, since the quote currency is not USD, even if your account is USD, not every Pip is worth $10.
Case Five: Currency Pairs with JPY in the Front (e.g., JPY/USD, JPY/EUR)
These currency pairs are less common, but some platforms or cross pairs may encounter them.
Example:
Trading 1 standard lot of JPY/USD with an exchange rate of 0.0076
Pip size = 0.01
Pip value = (0.01 ÷ 0.0076) × 100,000 ≈ $131.58
Note: When the exchange rate is less than 1, it causes the Pip value to “inflate.” This is rare in actual trading but still applicable using the formula.
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