All about pips in forex: a comprehensive guide
Discover what pips are in forex trading and how to calculate their value. Learn about their impact on risk management and trading strategies.
What is a pip?
A pip is a forex market convention, and it used to be the smallest unit of price movement that an exchange rate could make. A pip equals one-hundredth of 1% (1/100 × 0.01), and appears in the fourth decimal place (0.0001). Although there are now more precise methods for pricing (with more decimal places), the pip remains a standard value for brokers and trading platforms.
In most currency pairs, the quotation is made to four decimal places, and a pip is found in the fourth decimal (i.e., 1/10,000). For example, the smallest movement that the USDCAD currency pair can make is $0.0001, or one pip. The term "pip" is an acronym of "percentage in point", or "price interest point". It is important to note that a pip should not be confused with a basis point (bps), as the latter is used in interest rate markets and represents 0.01% or one-hundredth of 1%.
What is a pip in forex?
A pip is a fundamental concept in the forex market. It is a standard unit used in the forex market to measure the change of an asset’s price. People engaged in forex trading buy and sell a currency whose value is expressed in relation to another currency. The quotes for these currency pairs are shown in the form of bid and ask spreads, which are accurate up to four decimal places.
This unit of measurement is small enough to capture fluctuations in exchange rates, without resorting to fractions or more complex numbers. The value of a pip varies depending on the size of the traded lot. For example, if a standard lot of 100 000 units of the base currency is traded, each pip is worth about 10 units of the counter currency in the quote.
This standardization makes it easier to understand and compare price changes in currency pairs, and is a great help in developing safe trading plans.
How much is a pip worth in trading?
The value of a pip depends on three factors: the currency pair, the exchange rate, and the trade value. If your forex account is funded in US dollars (USD), and the USD is the second currency in the pair (or the quote currency), as in the EURUSD pair, the pip is fixed at 0.0001.
In this case, to calculate the pip value, you must multiply the trade value (or lot size) by 0.0001.
Let’s see an example. Imagine you are making a trade with EURUSD of 10 000 euros. Multiply the trade value by 0.0001. The pip is worth $1.
The formula is:
Trade value × quote currency pip = pip value
10 000 × 0.0001 = 1
Why calculate pips in forex?
Pips are used to assess market volatility. When a currency pair moves by many pips, this can be a sign of volatility. Since the movement of the exchange rate is the factor that determines whether a trader profits or loses, some use this information to determine their trading strategies, whether to take advantage of volatility, or to manage risk. The pip measurement is used to calculate risk exposure. Understanding and calculating pip value is crucial for setting profit goals and loss limits. The information provided by pips can help configure stop-loss and take-profit orders. Proper configuration of these orders maximizes profit opportunities and minimizes potential losses.
Exceptions to the pip rule
To offer more precise pricing, pipettes are used, which represent the fifth decimal place for most currency pairs. This higher precision is useful for high-frequency trading strategies, or when using automated trading robots.
When the currency pair involves the Japanese yen, the pip is measured differently. A pip is 0.0001 for most currency pairs, but for pairs involving the Japanese yen it is 0.01. The same applies to pipettes. Since a pipette is one-tenth of a pip, a normal pipette for most currency pairs is 0.00001, but for pairs involving the yen, it will be the third decimal place: 0.001. This is because the value of the yen is lower in relation to other major currencies.
In precious metals trading such as gold and silver, the pip measurement can be different. For example, in gold, a pip generally equals 0.01 of the price per ounce. This measure is crucial for those wanting to trade these metals because it allows for precise evaluation of the smallest price changes, which is important given the high volatility and economic value of gold and silver. Additionally, these small movements, measured in pips, can be used to apply scalping or intraday trading strategies, where traders seek to profit from small price fluctuations in very short periods.
What is a pipette in forex trading?
A pip is a standard unit of measurement for changes in an exchange rate, representing a movement of 0.0001 (1/10 000). This is the smallest price change for most currency pairs. A pipette equals 1/10 of a pip and represents a fraction of 1/100 000.
When we talk about a pip, we refer to a movement in the fourth decimal place, whereas a pipette is used to measure movement in the fifth decimal place. This distinction is useful for those trading large volumes, or using high-frequency trading strategies, where even small price fluctuations can have a significant impact on trade outcomes. Pipettes allow for greater precision and control over operations, facilitating better risk management and the ability to make the most of minimal price movements.
How to calculate pip value in forex and position size
Calculating pip value
Calculating the value of a pip in forex and determining the appropriate position size are fundamental skills for risk management and profitability in currency trading. These skills enable traders to understand the exact impact of market movements on their trades, and adjust strategies according to risk tolerance and financial goals.
Lot size
Lot size directly affects the pip value. The most common lot sizes are:
Formula for pip value
The pip value will differ depending on the currency pair and lot size. The general formula to calculate pip value is:
Pip value = (one pip / exchange rate) × lot size
For most pairs, one pip is 0.0001. For pairs involving the JPY, one pip is 0.01.
Example for EURUSD with a standard lot:
Pip value = (0.0001 / 1.1200) × 100 000 = $8.93
Position size
First, it’s important to determine the risk capital per trade. You need to decide how much you are willing to risk on each trade. A common percentage is 1% of total capital.
Next, calculate the stop-loss in pips. You should decide how many pips you are willing to lose on a trade if the market moves against your position.
Finally, apply the formula to calculate the optimal position size. For this, use the risk capital and pip value to determine the appropriate position size.
Position size = (risk capital / (pip value × stop loss in pips))
Example:
Using the previously calculated pip value:
Position size = ($100 / ($8.93 × 50)) = 0.224 standard lots
Accurately calculating pip value and determining the appropriate position size is essential for any forex trading strategy. These calculations not only help optimize profits and minimize losses, but also ensure that risk management stays within acceptable limits.
What is the monetary effect of a pip variation in trading?
The lot size you wish to trade and the corresponding pip value for the currency pair you want to trade are factors that determine the monetary effect of a pip variation. To calculate the monetary effect of a pip, you first need to calculate its value, and then determine the lot size. Standard lots are 100 000 units of the base currency, mini lots are 10 000 units, and micro lots are 1000 units.
For most currency pairs, if you are trading a standard lot, one pip typically equals 10 units of the quoted currency. For example, in the EURUSD pair, a movement of one pip for a standard lot would be around $10. In a mini lot (10 000 units), one pip equals approximately $1 in the same EURUSD pair. In a micro lot (1000 units), one pip equals $0.10.
Let’s look at a practical example:
If a trader trades a standard lot of the EURUSD pair and the price moves from 1.1200 to 1.1201 (a one-pip upward movement), the monetary effect of that one-pip variation would be a profit of $10. If the movement were downward, it would be a loss of $10.
Profit and loss calculation
To calculate profits and losses using pips, you first need to determine the pip value with the formula mentioned above:
Pip value = (one pip / exchange rate) × lot size
Next, calculate the number of pips. For example, if you open a EURUSD trade at 1.1200 and close it at 1.1250, the price has moved upwards 50 pips. If the trade moves in the opposite direction, it will result in an equivalent pip loss.
Finally, apply the pip value to the number of pips moved.
Profit or loss = number of pips moved × pip value per pip
Positive movement
If you bought EURUSD at 1.1200 and sold it at 1.1250, the pips moved are: 1.1250−1.1200=0.0050. This converts to 50 pips.
Negative movement
If you bought EURUSD at 1.1200 and sold it at 1.1150, the pips moved are: 1.1150−1.1200=−0.0050. This converts to -50 pips.
Important considerations
Leverage
Leverage is a double-edged sword in forex trading that allows traders to trade much larger volumes than the capital they actually hold. For example, if you use 100:1 leverage, you can control $100 000 in the market with just $1000 of your own capital. This can increase potential profits, but also amplifies the risk of losses. Although this tool allows you to trade larger volumes with less capital, the risk increases. A small adverse pip movement can result in a considerable loss.
Stop-loss and take-profit strategies
You must define how many pips you are willing to lose or gain in a trade to implement proper risk management.
Stop-loss
Limiting losses
A stop-loss order is placed so that when a position reaches a specific price that is less favorable than the current market price, the trade automatically closes. This way, you can limit potential losses if the market moves in an unexpected direction.
Risk management
Deciding how many pips you are willing to risk on a trade helps maintain control over your maximum losses without the need to monitor the market constantly.
Securing profits
Similar to a stop-loss order, a take-profit order is set to automatically close a position when the price reaches a predefined profit level. This helps capture gains before the market can reverse.
Exit strategy
Defining the number of pips you want to gain with each trade allows you to plan effective exit strategies and make decisions based on clear and measurable objectives.
What are the pips of the main currencies?
For most currency pairs, a pip equals a change of 0.0001 in the exchange rate. These values represent the fourth decimal place. However, for pairs involving the Japanese yen, the value represents the second decimal place, so a pip is a change of 0.01.
Pips of the main currencies
How to calculate pips in MetaTrader
After opening MetaTrader and selecting the currency pair you want to trade, you can view the real-time price chart. Once you have located the current price, take note of the ask and bid prices. To calculate the number of pips moved, identify two prices — for example, the opening and closing price of a trade, and, depending on whether the market has moved up or down, subtract the smaller price from the larger price.
Let’s look at an example. Suppose you are trading EURUSD:
Opening price: 1.1850
Closing price: 1.1875
Calculation: 1.1875−1.1850=0.0025
This movement represents 25 pips.
MetaTrader also offers useful tools like the pip calculator, which can automatically calculate the pips based on the opening and closing prices.
Lastly, consider the lot size, which will influence the monetary impact of the pips. Remember that lots can be:
To find out how much money a pip change represents, you can multiply the number of pips by the pip value per lot:
Pip value for most pairs in a standard lot is $10 per pip.
Monetary value of the movement: 25 pips × 10 USD/pip = $250
How to measure a candle in pips in MetaTrader
Measuring candles is a simple way to evaluate the size of a price movement over a given period. To do this, you need to open the chart of the currency pair you want to analyze in MetaTrader. Then, activate the “Crosshair” tool by clicking on the toolbar or pressing the middle mouse button (the scroll wheel) on the chart.
For a bullish candle
Measure from the lowest price at the bottom of the lower wick to the highest price at the top of the upper wick.
For a bearish candle
Measure from the highest price at the top of the upper wick to the lowest price at the bottom of the lower wick.
As you drag the cursor, MetaTrader will show the pip difference between the two selected points. Additionally, it will display the number of time periods (if you are measuring more than one candle), and the price difference.
The pip difference will appear as a number followed by “pips” in a small box that follows the cursor.
Make sure you are viewing the chart with enough zoom to place the cursor precisely on the candle’s extremes so you get an exact measurement. The number of pips may vary if you change your chart settings, such as candle types or price scale.
FAQ
What is the difference between a pip and a pipette?
A pip, short for "percentage in point," is the standard small movement a currency pair can make. This is typically 0.0001 for most currency pairs, but 0.01 for pairs involving the Japanese yen. A pipette is one-tenth of a pip. If a pip is the fourth decimal place for most pairs, a pipette is the fifth decimal place (0.00001). For yen pairs, a pipette is the third decimal place (0.001).
How are pips used?
Pips are part of the exchange rate quote for a currency pair. They represent fluctuations in the quote, and the value of a position in the market that could have been taken. Imagine a hypothetical case where you bought a currency pair at 1.1356, and sold it at 1.1360. You gained four pips in your trade. Then, you would just need to calculate the value of a single pip, and multiply it by your lot size to get the dollar value of your profit.
Are there currency pairs that do not use 0.0001 as a pip?
Yes, the Japanese yen is a notable exception in the Forex market. That means all pairs that include the yen in their quotation follow a different convention for the value of a pip.
In most currency pairs, a pip represents a change of 0.0001 in the quote value. However, in pairs that include the Japanese yen, such as USDJPY or EURJPY, the quote extends only two decimal places beyond the decimal point.
In these pairs, a pip equals 0.01, not 0.0001. This is because, historically, the Japanese yen has had a much lower value compared to other major currencies, such as the US dollar or the euro. A change of 0.01 in the Japanese yen is, proportionally, more significant and appropriate to reflect fluctuations in the exchange rate, whereas a change of 0.0001 would be too small to be practical.
What is a pip value calculator?
A pip value calculator is a tool used in forex trading to determine the monetary value of a pip in the account currency for a currency pair. This calculation is important for risk management and overall trading strategy.
The pip value calculator helps traders understand how much a one-pip change will be worth in monetary terms in their trades. This is crucial when setting the position size and adjusting stop-loss and take-profit levels for trades.
How does it work?
Select the currency pair you are trading. Since different pairs have different pip values, it’s important to choose the correct pair for an accurate calculation.
Enter the trade size (in lots). The lot size directly affects the pip value: The larger the lot, the greater the pip value.
Some calculators require you to input the current exchange rate for the currency pair. This is necessary to convert the pip value from one currency to another, especially if the account currency is different from the base or quoted currency in the pair.
How does leverage affect the value of a pip?
Leverage is a financial tool that enables you to trade with more money than you have by using a fraction of the total position value in your account. For example, if you use 100:1 leverage with an investment of just $1000, then you can trade with $100 000. The increase in trading volume has a direct and amplified effect on the monetary value of each pip. That means small market movements can result in larger profits or losses than those that would have been possible with an unleveraged trade. When using leverage, even though the pip value in terms of the fourth decimal place (or the second for yen pairs) does not change, the monetary value of each pip does because the total position size is much larger.
