What is a Pip in Forex Trading?

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"

Advanced Guidance

Build a repeatable, rules‑based process so decisions are consistent across sessions and instruments. Start from context (higher‑timeframe structure, positioning, macro tone), then define precise triggers and invalidation on execution charts. Track spread and depth so your order type matches conditions. Pre‑compute scenarios (breakout, fakeout, mean‑revert) and map actions for each to reduce hesitation.

Execution Framework

• Plan entries at levels with confluence (structure, momentum, time‑of‑day).
• Place stops beyond the logical invalidation, not arbitrary distances.
• Target at least 2–3R; scale out methodically and trail remainder.
• Avoid thin liquidity windows unless the setup explicitly requires it.
• Record slippage and spreads; poor fills can erase edge.

Review Loop

• Journal setups by session and pair to learn where they excel.
• Tag trades by catalyst (news, trend continuation, range breakout).
• Recalculate expectancy monthly; prune underperforming variants.

Risk Controls

Keep daily loss limits, reduce size after consecutive losses, and pause during regime shifts. Survival enables compounding; treat discipline and execution quality as part of your edge.

Backtesting and Metrics

Before committing capital, backtest Kagi rules across pairs and regimes. Track win rate, average R, max drawdown, and the effect of reversal size on trade frequency. Validate that adding Kagi bias improves your system’s expectancy versus a baseline. In live trading, review monthly metrics and adjust reversal size when volatility regime shifts so signals remain timely without over‑trading.

Case Study

On EUR/USD, a daily Kagi with 1.2×ATR reversal produced a series of yang flips as price built higher highs during a policy‑divergence phase. A trader mapped the most recent Kagi flip level and waited on the 1‑hour chart for a pullback and bullish acceptance back above that level, confirmed by rising tick activity at London open. Entry was taken on the retest, stop placed beyond the invalidation wick (below the Kagi flip zone), and targets set at 2R near prior range highs with a runner toward the next Kagi swing. The trade reached first target quickly; the remainder trailed under 1‑hour swing lows while daily Kagi stayed yang. When daily Kagi later thinned to yin after a sharp reversal on CPI, the runner was closed. The key ingredients were: using Kagi to define bias and clean levels, aligning entries with session liquidity, and enforcing predefined invalidation. This process avoided chasing noise, kept risk contained, and captured the directional impulse that Kagi was designed to reveal.

Additional Notes

Kagi integrates well with simple filters: trend by moving average slope on the same anchor timeframe, a volatility gate using ATR percentiles to avoid unusually thin or chaotic conditions, and a time‑of‑day gate to favor London and the London–New York overlap for follow‑through. Consider defining three playbooks—trend continuation, first pullback after a Kagi flip, and failed breakout reversion—to cover the most common paths. Each playbook should include specific entry triggers, invalidation, risk, and management logic so decisions are mechanical. Finally, maintain a small set of metrics for continuous improvement: average excursion before profit, typical reaction at Kagi flip retests, and distribution of outcomes by session. These measurements help you decide when to tighten rules, expand targets, or step aside entirely.