Every small shift in currency value counts in Forex Trading. But do you know how traders track tiny price changes in forex with utmost accuracy?
Forex Traders rely on “pips,” or “percentage in point”, to represent the smallest unit of price movement in a currency pair.
Yes, a pip helps traders measure gains or losses down to precise increments. But it can be challenging to calculate the pip values due to varying decimal placements—four for most pairs and two for yen pairs.
Let’s discuss in detail to grasp what is a pip in Forex, how to calculate it, and what’s the right way to leverage it in different trading strategies.
What is a Pip in Forex?
A pip is the smallest price movement in Forex trading. It is short for “percentage in point” or “price interest point”. You will see pips as the last decimal place in currency pairs. In most cases, this means the fourth decimal place, or 0.0001, for major currency pairs like EUR/USD.
Let’s say the EUR/USD pair goes from 1.1050 to 1.1051. The increase of 0.0001 USD represents one pip. Yes. Pips make it easier for you to track small price changes. It also helps you communicate price movements clearly.
It is also worth noting that in Japanese yen pairs like USD/JPY, a pip equals 0.01, or the second decimal place. For example, if USD/JPY moves from 110.50 to 110.51, that change represents one pip.
If you’re new to Forex, it’s important for you to know that Pips allow you to calculate profit and loss accurately. When you know pip values, you can also set stop-loss and take-profit levels.
Yes. Every pip movement can impact your trades. For example, a 10-pip increase or decrease can mean significant gains or losses. So, when you know pip values, you respond to currency fluctuations with confidence.
How Do Pips Work in Forex Trading?
Now, this is something very important for all FX beginners to understand. Pips help measure price changes in Forex trading.
Pips directly impact profit and loss in every trade. You gain or lose a specific amount based on pip changes. For instance, the Bank for International Settlements reports that tiny currency movements, even as small as one pip, influence the daily volume of $7.5 trillion traded globally in Forex markets. This effect makes pip calculations critical for understanding potential outcomes in your trades.
Let’s consider a 10,000-unit trade in EUR/USD, where each pip is worth $1. If EUR/USD rises by 20 pips, you would gain $20. But if it drops by 20 pips, your trade loses $20.
See? This shows how pip movements convert directly into profit or loss, so you assess risks more precisely.
Yes. You can manage risk effectively when you understand pip values. Reports from the Financial Conduct Authority emphasize that pip-based calculations are essential for setting stop-loss and take-profit levels. For instance, a stop-loss set 20 pips below your entry point can protect you from potential losses.
In short, pips enable you to measure price changes, calculate profits or losses, and manage risk efficiently. Each pip brings clarity to your trades, just to make it easier to plan and control outcomes confidently.
However, in situations of hyperinflation, pips lose their relevance. This happened in Zimbabwe’s 2008 crisis with an inflation rate exceeding 79 billion percent. During such extreme conditions, currency values can fluctuate so massively that smaller units like pips fail to capture meaningful price movements.
You’re New to FX? Read Our Comprehensive Guide to Forex Trading for Beginners.
How to Calculate the Value of a Pip?
There are two ways to calculate the value of a pip in Forex Trading. Manual vs automated.
You can automate the calculation process with the help of a pip calculator. Yes. There are tools available which lets you find the exact monetary value of a pip for any currency pair quickly. You enter the currency pair, trade size, and account currency, and the calculator shows how much each pip movement affects your profit or loss.
It is worth noting that the pip value calculator adapts to different decimal placements, like the fourth decimal for most pairs or the second for yen pairs, and it adjusts for your specific trade size or lot. Yes. If you use a pip calculator, it keeps your risk management precise. It allows you to set accurate stop-loss and take-profit points, all while avoiding overestimates or underestimates on pip values. Ultimate benefit? You can gain clear insights into possible trade outcomes without the manual math.
Now, let’s look at different examples to help you understand how can you manually calculate the value of pip in Forex Trading.
In most currency pairs, such as EUR/USD, a pip is the fourth decimal place or 0.0001. Let’s say you trade 10,000 units (one mini lot) of EUR/USD at an exchange rate of 1.1050.
- Formula: Pip Value = (0.0001 / Exchange Rate) x Trade Size
- Calculation: (0.0001 / 1.1050) x 10,000 = $0.90 per pip
In this trade, every 1-pip movement equals $0.90. If the price rises by 20 pips, you would gain $18. If it drops by 20 pips, you would lose $18.
Now, let’s consider another example.
Japanese yen pairs, such as USD/JPY, calculate pips differently. Here, a pip represents the second decimal place or 0.01. Let’s say you trade 10,000 units of USD/JPY at an exchange rate of 110.50.
- Formula: Pip Value = (0.01 / Exchange Rate) x Trade Size
- Calculation: (0.01 / 110.50) x 10,000 = $0.90 per pip
In this example, each pip change equals $0.90. If USD/JPY rises by 10 pips, your profit would be $9. If it falls by 10 pips, you would lose $9
Still need more clarity? Okay. Let’s go through one more example.
If your account currency differs from the quote currency in the pair, you need to convert the pip value. Suppose you trade 100,000 units of GBP/USD with an exchange rate of 1.3000. Your account is in EUR, and the EUR/USD rate is 1.10.
- Calculate Pip Value in USD: (0.0001 / 1.3000) x 100,000 = $7.69 per pip
- Convert to EUR: $7.69 / 1.10 = €6.99 per pip
In this trade, each pip change equals €6.99. A 15-pip gain or loss translates to €104.85.
Which Factors Influence Pip Values?
The following factors influence the value of a pip in Forex trading:
1. Currency Pair
The currency pair you choose to trade directly affects the pip value. Most currency pairs calculate a pip as 0.0001 (the fourth decimal place). However, pairs involving the Japanese yen (like USD/JPY) use 0.01 (the second decimal place) because of the yen’s lower value.
Let’s consider two trades of 10,000 units each:
- EUR/USD: Pip Value = (0.0001 / 1.2000) x 10,000 = $0.83 per pip
- USD/JPY: Pip Value = (0.01 / 110.00) x 10,000 = $0.91 per pip
Since each currency has a different value, the pip value varies accordingly. The Bank for International Settlements reports that USD/EUR and USD/JPY are among the highest-traded pairs, accounting for 44% of the daily $7.5 trillion Forex trading volume globally. Yes. High trading volume increases liquidity and often results in stable pip values.
2. Trade Size
The size of your trade also impacts the pip value. Larger trades lead to higher pip values, meaning that each pip movement has a more significant effect on profit or loss. In Forex, trade sizes are commonly measured in lots:
- Standard Lot: 100,000 units
- Mini Lot: 10,000 units
- Micro Lot: 1,000 units
Let’s suppose you’re trading USD/CHF at an exchange rate of 0.9000:
- Standard Lot (100,000 units): Pip Value = (0.0001 / 0.9000) x 100,000 = $11.11 per pip
- Mini Lot (10,000 units): Pip Value = (0.0001 / 0.9000) x 10,000 = $1.11 per pip
- Micro Lot (1,000 units): Pip Value = (0.0001 / 0.9000) x 1,000 = $0.11 per pip
Now, you need to understand that a larger trade size means greater exposure to risk, as each pip movement affects the overall trade significantly. In fact, according to the Financial Conduct Authority, traders with larger positions must apply careful risk management to prevent losses that exceed their risk tolerance.
3. Account Currency
Your account currency can alter the pip value, especially if it’s different from the quote currency in the pair you’re trading. In such cases, you convert the pip value based on the exchange rate between your account currency and the quoted currency.
Suppose you hold an account in EUR and trade GBP/USD with a 100,000-unit (Standard Lot) position at an exchange rate of 1.3000. If the EUR/USD rate is 1.10, here’s how to calculate pip value:
- Calculate Pip Value in USD: (0.0001 / 1.3000) x 100,000 = $7.69 per pip
- Convert to EUR: $7.69 / 1.10 = €6.99 per pip
Your pip value in this case is €6.99. The requirement to convert pip values based on your account currency adds complexity to risk management but helps align gains or losses with your base currency.
4. Market Volatility
Higher volatility in a currency pair leads to faster price changes and larger pip movements. High-impact economic events, such as interest rate decisions or geopolitical news, increase volatility, affecting pip values and trading outcomes.
During a high-volatility event, such as an interest rate announcement by the U.S. Federal Reserve, USD pairs may experience sudden price shifts. If USD/EUR moves by 50 pips within minutes, the profit or loss will be more substantial than in low-volatility conditions.
In fact, a report by Bloomberg shows that major economic announcements can increase pip movements by up to 60% on average during high-impact events, thus creating a significant opportunity and risk for traders. Forex traders, especially the beginners, must understand the impact of volatility on pip values to smartly anticipate possible gains and losses.
Also Read: Forex vs. Stocks: Which Market to Choose?
5. Leverage
Leverage amplifies pip values by increasing your effective trade size without requiring more of your capital. Higher leverage means each pip movement has a stronger effect on profits and losses. Remember that leverage can help maximize gains, but it also raises risk, especially in volatile markets.
Suppose you trade EUR/USD with 50:1 leverage on a 10,000-unit position. Normally, a 10-pip movement would yield $10 (based on $1 per pip). With 50:1 leverage, however, the effective trade size increases, making each pip movement worth more in terms of impact on your margin.
The European Securities and Markets Authority reports that retail traders using high leverage often experience increased losses, with more than 70% of leveraged trades leading to account drawdowns. So, yes. Proper leverage management helps ensure that pip movements remain within your control.
How to Apply Pip Values to Trading Strategies?
Well, this is important for you to understand how to apply pip to best Forex trading strategies. Because pip directly affects your profits and losses, while guiding your strategy and helping you set accurate stop-loss and take-profit levels.
Here’s how to use pip values to sharpen your trading approaches:
Setting Stop-Loss and Take-Profit Levels in a Trend-Following Strategy
Trend-following strategy requires you to look for a sustained upward or downward trend in a currency pair. You need to set stop-loss and take-profit levels based on pip values to lock in profits or limit losses.
Suppose you’re trading EUR/USD and identify a strong upward trend. You place a buy order at 1.1000 with a 50-pip stop-loss and 100-pip take-profit.
- Entry: 1.1000
- Stop-Loss: 1.0950 (50 pips below entry)
- Take-Profit: 1.1100 (100 pips above entry)
- Trade Size: 10,000 units
Each pip in EUR/USD is worth $1 for a 10,000-unit trade. Therefore, if the price hits your stop-loss, you’ll lose $50 (50 pips x $1). If the price reaches your take-profit level, you’ll gain $100 (100 pips x $1). By setting these levels based on pip values, you maintain a 1:2 risk-to-reward ratio, which helps balance potential losses and gains.
Position Sizing in a Scalping Strategy
Scalping involves taking quick trades to capture small price movements. Right? It is important to calculate the correct pip value and position size in this high-frequency trading strategy. Because profits rely on minimal pip movements.
For example, you’re scalping USD/JPY and target a 10-pip profit per trade. You want to limit your risk to $10 per trade.
- Pip Value for 1,000 Units (Micro Lot): (0.01 / 110.00) x 1,000 = $0.09 per pip
- Trade Size Needed: $10 / 10 pips = 1,111 units
Rounding down to 1,000 units keeps your risk near the target of $10. Each pip movement in this trade is worth approximately $0.09. Right? A successful 10-pip trade yields $0.90 profit, while a 10-pip loss costs $0.90. Use pip values to size positions and control risk precisely. This is surely essential in a scalping strategy.
Read: Can You Succeed With a Forex Scalping Strategy?
Calculating Risk in a Swing Trading Strategy
Swing trading involves holding trades for several days to capture larger price moves. You base entry, exit, and risk levels on technical indicators and pip values, which allows for a more balanced risk-reward ratio.
Now, let’s consider that you decide to trade GBP/USD and expect a 150-pip movement based on recent market analysis. Your account balance allows a risk of up to $75 on this trade, with a target profit of 300 pips.
- Pip Value for 10,000 Units (Mini Lot): (0.0001 / 1.2500) x 10,000 = $0.80 per pip
- Stop-Loss and Take-Profit Levels:
- Stop-Loss: 150 pips x $0.80 = $120 (exceeds your risk limit)
- Adjusted Trade Size: $75 / (150 pips x $0.80) = 6,250 units
You must stay within your risk tolerance. Only then you’d reduce your position to 6,250 units. If the trade reaches the 300-pip target, the profit would be $150.
This clearly shows how pip values help align risk with your account size and trade goals in swing trading. Right?
Risk Controlling in a Breakout Strategy
A breakout strategy involves entering trades when prices move beyond a specific resistance or support level. If you calculate pip values and set appropriate stop-loss levels, then you can control the risk on volatile price swings typical of breakouts.
Let’s say you trade AUD/USD and identify a potential breakout above 0.7400. You enter with a buy order at 0.7405 and set a stop-loss 20 pips below at 0.7385 to minimize risk.
- Pip Value for 100,000 Units (Standard Lot): (0.0001 / 0.7405) x 100,000 = $13.51 per pip
- Potential Loss: 20 pips x $13.51 = $270
You risk $270 on this breakout trade. If AUD/USD surges as expected, a 40-pip move to 0.7445 would yield $540 (40 pips x $13.51). Pip values in a breakout strategy enable you to manage volatility and adjust position sizes or stop-loss levels to align with your risk tolerance.
Wrapping Up
Here are some essential tips to ensure you’re leveraging pip values effectively in your forex strategy.
First, use a pip calculator to simplify your calculations. FXTM highlights that calculators remove the complexity, which helps you focus on strategy and risk management with precision. Next, adjust your trades based on volatility. Each currency pair varies in volatility, which impacts pip values and profit potential. Like Investopedia suggests, you need to closely monitor market conditions to better plan entry and exit points.
There’s more.
You need to stay informed about economic news releases, as they can cause significant pip movements. The Bank of International Settlements recommends tracking an economic calendar for critical events like interest rate changes and inflation updates, which can lead to sudden market shifts.
Lastly, practice with a demo account before moving to live trades. Baby Pips advises that demo accounts are valuable for building confidence in calculating and applying pip values without financial risk.
