What is a Pip in Forex Trading?

Q: What is a Pip in Forex Trading?

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.

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:

Lot size - How much currency you're trading
Currency pair - Which pair you're trading
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).