Pip in Forex — Meaning, Example, and How to Calculate
Pip in Forex — Meaning, Example, and How to Calculate
Clear explanation • Practical example • Calculation method • Common mistakes
Definition
A pip (short for “percentage in point”) is the smallest standard price movement in most forex pairs. For most currency pairs, 1 pip equals 0.0001. For pairs quoted to two decimal places (like USD/JPY), 1 pip equals 0.01.
Why Pips Matter
- Pips measure price movement in forex.
- They help traders calculate profit, loss, and risk.
- Pip value changes depending on the currency pair and trade size.
Example
EUR/USD moves from 1.1050 to 1.1055.
Change = 0.0005 = 5 pips.
If you traded 1 standard lot (100,000 units), each pip is worth $10, so 5 pips = $50.
How to Calculate Pip Value
Formula:
Pip Value = (One Pip / Exchange Rate) × Lot Size
Example for EUR/USD at 1.1050, 1 standard lot:
Pip Value = (0.0001 / 1.1050) × 100,000 ≈ $9.05
Fractional Pips (Pipettes)
Many brokers quote prices with an extra decimal place (e.g., 1.10503). The last digit is a pipette, equal to one-tenth of a pip.
Common Mistakes
- Confusing pips with points or ticks in other markets.
- Not adjusting pip value when trading different lot sizes.
- Ignoring pipettes when scalping or trading with small stop-losses.
Quick FAQ
Q: Is a pip always worth $10?
A: No, it depends on lot size and the currency pair’s exchange rate.
Q: Why do some pairs have 2 decimal places?
A: JPY pairs traditionally use 2 decimals because of their lower relative value per unit.
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