Before you place your first forex trade, understanding what a pip is can make the difference between profitable trading and costly mistakes.
Whether you’re analysing EUR/USD movements or calculating potential profits from a long position, pips form the foundation of every trading decision in the forex market.
A pip serves as the universal language that forex traders use to measure price movements, calculate pip values, and manage risk across all currency pairs.
From major currencies like the US dollar to exotic pairs involving the Japanese yen, mastering this fundamental concept will transform how you approach forex trading.
In this detailed guide, you will learn what pips are, how they function in various forex currency pairs, and, most importantly, how to determine their value for your unique trading situations.
You’ll learn the notable exception that yen pairs present, understand the difference between pips and fractional pips (pipettes), and see practical examples that bring these concepts to life (aligned with widely used definitions from leading brokers and education sources).
What is a Pip in Forex
A pip stands for “percentage in point” or “price interest point” and represents the smallest standardised unit of price movement in a forex currency pair.
Think of it as the standard unit that measures how much a currency’s value changes relative to another currency in the forex market.
For most currency pairs, one pip equals 0.0001, which represents the fourth decimal place in the exchange rate.
This mirrors the industry-standard definition used by major educators and brokers: if EUR/USD moves from 1.1250 to 1.1251, that’s one pip.
For Japanese yen pairs, one pip equals 0.01, the second decimal place, so a move in USD/JPY from 110.40 to 110.41 is one pip.
Many brokers also display fractional pips, called pipettes, which are one-tenth of a pip (0.00001 on most pairs; 0.001 on JPY pairs).
Understanding pips is essential before starting any forex trading activity because they directly impact your profit and loss calculations.
Every trade you make is measured in pips from entry to exit and from stop-loss to take-profit.
Without this knowledge, you cannot accurately assess risk or calculate the value of your trading positions.
The pip system creates consistency across all forex pairs and trading platforms, enabling traders to quickly compare price movements between different currencies.
Whether you’re trading major currency pairs or exotic pairs, the pip concept remains constant (with the JPY decimal exception).
Understanding Pip Values and Decimal Places
Most major currency pairs, including EUR/USD, GBP/USD, and other pairs where the US dollar serves as the quote currency, are quoted to four decimal places.
This means the pip is the fourth decimal place, with each unit change at this level constituting one pip movement.
However, Japanese yen pairs such as USD/JPY, EUR/JPY, and GBP/JPY are quoted to two decimal places, making the second decimal place the pip location.
This reflects the yen’s smaller unit value and is consistent with the standard pip definition used across the industry.
Here’s how pip movements appear across different currency pairs:
| Currency Pair | Price Movement | Pip Change |
|---|---|---|
| EUR/USD | 1.2345 → 1.2346 | +1 pip |
| GBP/USD | 1.3456 → 1.3446 | −10 pips |
| USD/JPY | 110.25 → 110.26 | +1 pip |
| EUR/JPY | 130.45 → 130.55 | +10 pips |
| USD/CAD | 1.2500 → 1.2505 | +5 pips |
This decimal-place convention matches how trading platforms display prices and how pip values are calculated.
What is a pipette?
A pipette, also called a fractional pip or simply a point, equals one-tenth of a standard pip.
Many modern forex brokers now quote prices to five decimal places for most currency pairs (three decimal places for JPY pairs), with this additional digit representing the pipette.
For EUR/USD, a movement from 1.23456 to 1.23457 equals one pipette (0.00001).
Pipettes enable tighter spreads, more precise entry and exit levels, and finer-grained risk management, all consistent with how leading brokers and educators define fractional pips.
Most platforms visually highlight the pipette digit (smaller or superscript), helping you distinguish it from the main pip.
How to Calculate Pip Values
Pip value calculation forms the cornerstone of forex trading mathematics, directly determining your potential profit and loss for any given trade.
The pip value depends on three key factors: the currency pair being traded, the current exchange rate, and your position size (lot size), plus conversion to your account currency where applicable.
While most platforms calculate pip values automatically, understanding the manual calculation improves accuracy and confidence.
Calculating Pip Values for USD Quote Currency Pairs
For currency pairs like EUR/USD, GBP/USD, and others where the USD is the quote currency, the calculation is straightforward:
Formula:
Pip Value = Position Size × 0.0001
- 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
Example:
Enter long GBP/USD at 1.3000 with one standard lot and exit at 1.3050:
50 pips × $10 = $500.
Calculating Pip Values for USD Base Currency Pairs
When the USD serves as the base currency (e.g., USD/CAD, USD/CHF), the pip value must be converted using the current exchange rate:
Formula:
Pip Value = (Position Size × 0.0001) ÷ Exchange Rate
Examples (standard lot):
- USD/CAD at 1.3500: (100,000 × 0.0001) ÷ 1.3500 = $7.41 per pip
- USD/CHF at 0.9200: (100,000 × 0.0001) ÷ 0.9200 = $10.87 per pip
This value fluctuates with the exchange rate.
Japanese Yen Pairs Calculation
Yen pairs use 0.01 as the pip value instead of 0.0001:
Formula:
Pip Value = (Position Size × 0.01) ÷ Exchange Rate
Example (USD/JPY at 150.00, standard lot):
(100,000 × 0.01) ÷ 150.00 = $6.67 per pip.
For cross-yen pairs like EUR/JPY, convert the result into your account currency using the current USD/JPY rate to keep P&L consistent.
Converting Pip Values to Your Account Currency
When your account currency differs from the quote currency, convert the pip value for accurate profit and loss calculations.
Examples:
- ZAR account trading EUR/USD: if $10 per pip and USD/ZAR = 18.50, then R185 per pip.
- EUR account trading USD/CAD: base pip value 7.41 CAD; with EUR/CAD = 1.4800, pip ≈ €5.01.
- GBP account trading EUR/USD: base pip value $10; with GBP/USD = 1.2500, pip ≈ £8.00.
Platforms update these conversions in real time, but manual checks help validate your risk calculations.
Using Pips in Trading Strategy and Risk Management
Pips anchor risk management and position sizing. Traders define stop-loss and take-profit in pips to keep risk consistent.
Position sizing formula:
Position Size = (Account Risk in Currency) ÷ (Stop Loss in Pips × Pip Value)
Scenario 1: EUR/USD Day Trade
- Entry: 1.1000
- Stop Loss: 1.0980 (20 pips)
- Take Profit: 1.1040 (40 pips)
- Risk-Reward Ratio: 1:2
Scenario 2: GBP/USD Swing Trade
- Entry: 1.2500
- Stop Loss: 1.2450 (50 pips)
- Take Profit: 1.2650 (150 pips)
- Risk-Reward Ratio: 1:3
This pip-based approach supports disciplined, data-driven forex trading.
Forex Spreads and Pips
The spread is the cost of opening a trade, and it is measured in pips. It is the difference between the bid and ask.
Example:
If EUR/USD is 1.1050/1.1052, the spread is 2 pips. The market must move 2 pips in your favour to reach breakeven.
The typical spread ranges during liquid hours are as follows (indicative):
| Currency Pair | Typical Spread Range |
|---|---|
| EUR/USD | 1–2 pips |
| GBP/USD | 2–3 pips |
| USD/JPY | 1–2 pips |
| USD/CHF | 2–3 pips |
| AUD/USD | 2–4 pips |
| USD/CAD | 2–4 pips |
Spreads can widen around news and in low-liquidity conditions; they’re often tighter on major pairs and wider on exotics.
Apply your Pip knowledge.
Understanding what a pip is in forex is the essential first step toward successful currency trading.
Pips provide the standardised measurement that underlies every trading decision, from the basic definition (0.0001 for most pairs, 0.01 for JPY pairs) to pipettes (0.00001), pip values, and spread costs.
Apply this knowledge to a demo account; practice converting pip values for different position sizes and account currencies (including ZAR for South African traders); and let pip-based risk management guide your strategy.
