What is a Pip in Forex Trading?

Quick Answer

A pip (Percentage in Point) is the smallest price movement in forex trading. For most currency pairs, a pip is the 4th decimal place (0.0001), while for JPY pairs it's the 2nd decimal place (0.01). Pips measure profit, loss, and price changes.

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Understanding Pips in Forex

When you trade forex, you need to measure price movements accurately. The pip is your basic unit of measurement - think of it as the "penny" of forex trading.

How Pips Work

Most currency pairs are quoted to 4 decimal places:

  • EUR/USD at 1.1050 → 1.1051 = 1 pip increase
  • GBP/USD at 1.2735 → 1.2725 = 10 pip decrease

Japanese Yen pairs are different - quoted to 2 decimal places:

  • USD/JPY at 149.50 → 149.51 = 1 pip increase

What is a Pipette?

Many brokers quote an extra decimal place called a pipette (or fractional pip):

  • EUR/USD: 1.10505 (the 5 is a pipette = 1/10th of a pip)
  • USD/JPY: 149.505 (the 5 is a pipette)

Calculating Pip Value

The monetary value of a pip depends on:

  1. Lot size - How much currency you're trading
  2. Currency pair - Which pair you're trading
  3. Account currency - Your account's base currency

For a standard lot (100,000 units) of EUR/USD with a USD account:

  • 1 pip = $10
  • 10 pips = $100
  • 100 pips = $1,000

Why Pips Matter

Understanding pips is crucial because they help you:

  • Calculate profit/loss - "I made 50 pips on EUR/USD"
  • Set stop losses - "My stop is 30 pips below entry"
  • Measure spreads - "This broker has 1-pip spreads"
  • Assess risk/reward - "Risking 20 pips to gain 60 pips"

Practical Example

You buy EUR/USD at 1.1000 and sell at 1.1050. That's a 50-pip gain. With a mini lot (10,000 units), you earned $50 (50 pips × $1 per pip for mini lots).

Related Terms

SpreadLot SizeStop Loss

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