What is a Pip in Forex and How Much are They Worth?
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Learn what is a pip in forex
A commonly asked question, what is a Pip in Forex? A Pip is the smallest unit of measuring a price move. It’s not a word, but rather an acronym for percentage in point (with some variables like point in percentage also widely accepted). Calculate how much they’re worth and ultimately use this knowledge to manage your overall risk.
When displaying the major Forex currency pairs such as EUR/USD on your trading platform, your broker will quote to the 4th or 5th decimal place. A pip is the 4th number in your broker’s price quote, while a pipette (or fraction of a pip), is the 5th.
Although a pip may seem an insignificant price movement, when you consider the leverage that Forex brokers offer to traders, even a relatively small move in terms of pips can be highly lucrative.
Only after you fully understand what a pip in Forex is, should you open a trading account and start risking your capital.
What is a Pip in Forex?
A pip in Forex currency pairs, is the 4th decimal place in your broker’s price quote. Not sure how Forex trading works?
Take a look at the following example of a pip:
- If EUR/USD were to move one pip higher, price would now be 1.10520.
- If EUR/USD were to move one pip lower, price would now be 1.10490
Here’s another example, that will help make pip moves clearer for you:
While a pip in the major currency pairs is the 4th number in your broker’s price quote, pairs containing the Japanese Yen display things a little differently. Yen pairs such as USD/JPY are only quoted to 3 decimal places, and as such, a pip is the 2nd decimal. If USD/JPY were to move one pip higher from 105.000, price would now be 105.010. This can be better understood when you understand what Forex trading is.
What is a Pipette?
A pipette in currency pair quotes, is the 5th decimal place in your broker’s price quote.
Most of the South African Forex brokers that we’ve reviewed display five decimal places on all price quotes but pipettes are just fractions of a pip.
On some Forex trading platforms this is clear, while on others such as MT4, it isn’t. Make sure you’re not confusing a pip with a pipette! Learn how to calculate margin in Forex.
How Much Money is a Pip in Forex Worth?
Knowing how much money a single pip movement is worth is imperative for the risk management aspect of your trading strategy. To keep things simple, all of the examples below assume that the base currency of your trading account is denominated in USD.
If you’re trading on an account denominated in ZAR, you’ll have to add an extra line of math to your calculations to consider this.
Currency Pairs – USD Listed 2nd
Forex currency pairs featuring the USD are the most liquid currency pairs.
Some examples of the most common Forex majors in this group are EUR/USD, GBP/USD, AUD/USD and NZD/USD.
When USD is listed as the 2nd currency in the pair, pip values remain fixed.
Knowing how much a pip is worth is as simple as remembering the following list:
- If trading 1.0 standard lots, it’s USD 10 per pip.
- If trading 0.1 of a standard lot, it’s USD 1 per pip.
- If trading 0.01 of a standard lot, it’s USD 0.10 per pip.
Keep in mind that whichever currency your account is denominated in, when you’re trading a pair where that currency is listed 2nd, your pip values are fixed.
So for South African Forex traders, this would apply to ZAR accounts and trading XXX/ZAR pairs.
Currency Pairs – USD Listed 1st
Some examples of these types of pairs are USD/ZAR, USD/CAD, USD/CHF and USD/JPY.
To work out how much a pip is worth, you must divide the pip values above by the USD/XXX rate.
To get the value of how much a USD/ZAR pip is worth on a standard lot trade (on a USD denominated account) do the following:
$10 divided by the USD/ZAR rate.
So If the USD/ZAR rate is 15.00000, then after doing the above equation, a pip is worth USD 0.66.
A more generic formula to calculate the pip value would be:
One Pip Decimal Place: 0.0001 (JPY pairs 0.01)
Account Denominated Currency: USD
Selected Currency Pair: USD/ZAR
Exchange Rate: 15.0000 (USD/ZAR)
Lot Size: 1 Standard Lot (100000 USD)
Pip Value Calculation = 0.0001 / 15.0000 * 100000
Each Pip is worth USD 0.66
Forex Currency Pairs – Currency Crosses
But not all Forex currency pairs feature USD and are known as currency crosses.
Some examples of currency crosses are AUD/NZD, EUR/GBP, CAD/CHF and EUR/JPY.
As we outlined above, if you have an account denominated in the currency that’s 2nd in the pair, your pip values are fixed. For any of the currency crosses, you must calculate the pip value in the currency that comes 2nd in the pair, then convert that pip value to USD, or your denominated account currency.
This is done by using the currency pair that combines the USD and the currency that comes 2nd in the pair.
To work out how much a EUR/GBP pip is worth on a standard lot trade (on a USD denominated account), do the following:
We know that if you had a GBP account, then a pip in EUR/GBP would be GBP 10, but we now have to convert that GBP 10 to USD to match your account.
To get there, we divide GBP 10 by the USD/GBP rate – for example, 0.900000.
This would make the pip value in EUR/GBP for a standard lot trade, USD 11.11.
It’s a little confusing because the USD/GBP rate is quoted as GBP/USD. You just have to divide it by 1 to flip the quote backwards for it to work.
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Trade Example Using the Value of a Pip in Managing Risk
Knowing what a pip in Forex is, forms an essential foundation to implement your risk management strategy. Let’s say your trading strategy requires you to risk only 2% of your USD 5,000 account per trade, while maintaining a reward: risk of 3:1. This ties in with you trading strategy, explained in more detail in our how to start Forex trading article.
You find a potential opportunity to buy EUR/USD. You decide to place your stop loss below support, 50 pips away and your take profit 150 pips higher to reach 1:3. To risk only 2% of your account, you now must work out how big your trade volume in lots are.
2% of USD 5,000 is USD 100, so that’s as much of your account as your strategy allows you to risk.
As you now know from above, if you’re trading 0.1 of a standard lot, then they’re worth USD 1 per pip.
From here, you’re able to work out that with a 50 pip stop you must open a 0.2 lot trade.
Final Thoughts on Pips in Forex
You might now think you have to be some sort of math-whiz to work out proper position sizing.
You can relax, you don’t.
There are several simple to use Forex calculators online to save you a ton of time. You can even find a Forex position size calculator to run as a plugin within your broker’s MT4 platform. Now you understand the following: what is a pip in Forex and how to calculate the size of your position. You are ready to open an account and start Forex trading yourself.
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Heinrich is a Forex and CFD enthusiast with a passion for writing good informative quality content. He strives to showcase the best Forex Brokers in South Africa. Join him on his Journey!
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