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What is a Pip in Forex Trading?

If you are interested in Forex and read analysis or commentary pieces, you will likely have come across mention of the term pip or pips. This is because a pip is a very common term in Forex trading. But what is a pip?

This article is going to answer that question, explaining the meaning of a pip and how useful a concept it is when trading Forex. So to find out what a pip is in trading Forex, just read on!

Pip Definition

A pip is an incremental price movement, with a specific value dependent on the market in question. Put simply, it is a standard unit for measuring how much an exchange rate has changed in value.

Originally, a pip was effectively the smallest increment in which an FX price would move, though with the advent of more precise methods of pricing, this original definition no longer holds true. Traditionally, FX prices were quoted to a set number of decimal places – most commonly, four decimal places – and, originally, a pip was a one-point movement in the final decimal place quoted. Many brokers now quote Forex prices to an extra decimal place; however, meaning that a pip is frequently no longer the final decimal place in a quote.

It remains a standardised value across all brokers and platforms, making it very useful as a measure that allows traders to always communicate in the same terms without confusion. Without such a specific unit, there would be a risk of comparing apples to oranges, when talking in generic terms such as points or ticks.

How much is a pip?

For most currency pairs, one pip is a movement in the fourth decimal place. The most notable exceptions are those FX pairs involving the Japanese yen. For pairs involving the JPY, one pip is a movement in the second decimal place.

The following table shows Forex pips values for some common currency pairs:

Forex Pair

One pip

Sample price

Lot size

Forex pip value (1 lot)

EUR/USD

0.0001

1.16671

EUR 100,000

USD 10

GBP/USD

0.0001

1.31114

GBP 100,000

USD 10

USD/JPY

0.01

113.553

USD 100,000

JPY 1000

USD/CAD

0.0001

1.27326

USD 100,000

CAD 10

USD/CHF

0.0001

0.99543

USD 100,000

CHF 10

AUD/USD

0.0001

0.76260

AUD 100,000

USD 10

NZD/USD

0.0001

0.69008

NZD 100,000

USD 10

Multiplying your position size by one pip will let you answer the question of how much is a pip worth. Let's say you are looking to trade the EUR/USD and you decide to buy one lot. One lot is worth EUR 100,000. One pip is 0.0001 for EUR/USD. The currency value of one pip for one lot is therefore 100,000 x 0.0001 = $10.

Let's say you buy the EUR/USD at 1.16650 and later close your position by selling one lot at 1.16660. The difference between the two is:

1.16660 - 1.16650 = 0.00010

In other words, the difference is 1 pip. You will have made $10. If we work through these sample numbers from a different angle, we can further illustrate what a pip is in trading.

Trading Pips Explained

You opened your position at 1.16650, and you bought one contract. This is buying EUR 100,000. Notionally, you are selling dollars to purchase the Euros. The value of the Dollars that you are notionally selling is naturally dictated by the exchange rate.

EUR 100,000 x 1.16650 USD/EUR = USD 116,650

You closed your position by selling one contract at 1.16660. Notionally, you are selling the Euros and buying the Dollars.

EUR 100,000 x 1.16660 USD/EUR = USD 116,660

That means you originally sold $166,650 and ended up with $166,660, for a profit of $10. From this, we can see that a one-pip movement in your favour made you $10.

In fact, this trading pips value is consistent across all FX pairs that are quoted to four decimal places – a movement of one pip in the exchange rate is worth 10 units of the quote currency (i.e., the second-named currency) if you are dealing in a size of one lot (which is always 100,000 units of the base currency, i.e., the first-named currency). A move of 10 pips is worth 100 units of the quote currency. A move of 100 pips is worth 1,000 units of the quote currency, and so on.

What about currencies that are not quoted to four decimal places?

The most notable currency here is the Japanese yen. Currency pairs involving the yen were traditionally quoted to two decimal places and FX pips for such pairs are therefore governed by the second decimal place. So let's take a look at how to calculate pips with the USD/JPY.

If you sell one lot of the USD/JPY, a downward move of one FX pip in the price will make you 1,000 yen. Let's work through an example to see why.

The USD/JPY Currency Pip Example

Let's say you sell two lots of the USD/JPY at 113.607. One lot of the USD/JPY is USD 100,000. You are therefore selling 2 x USD 100,000 = USD 200,000 in order to buy 2 x 100,000 x 113.607 = JPY 22,721,400.

The price moves against you and you decide to cut your losses. You close out at 114.107. One pip for the USD/JPY is a movement in the second decimal place. The price has moved against you by 0.50, which is therefore 50 pips.

You closed your position by buying 2 lots of the USD/JPY at 114.107. To buy back $200,000 of USD at this rate costs 2 x 100,000 x 114.107 = JPY 22,821,400.

This is JPY 100,000 more than your original sale of dollars gave you, so that you have a shortfall of JPY 100,000.

Losing JPY 100,000 for a 50-pip movement means that for each pip you lost 100,000/50 = JPY 2,000. Since you sold 2 lots, this is a pip value of Y1,000 per lot.

If your account is denominated in a currency that is different to the quote currency, it will affect the pip value. You can use our Trading Calculator to very easily work out pip values.

What does Pip Stand For?

Some say that the term "pip" originally stemmed from Percentage-In-Point, but this may be a case of false etymology. Others claim it stands for Price Interest Point.

Whatever the origin of the term, pips allow currency traders to talk about small changes in exchange rates in readily understandable terms. This is similar to how its cousin – the basis point (or bip) – allows easier discussion of small changes in interest rates. This gives us the most basic answer to what pips are useful for – it is much easier to say cable has risen 55 pips, for example, than to say it's gone up by 0.0055.

Let's look at how FX prices appear in MetaTrader 4 to further illustrate what is a Forex pip.

Forex Pips: Prices in MT4

The image below shows an Order screen for the GBP/USD in MetaTrader 4:

Pip1.png

Image source: MetaTrader 4 platform, pricing from Admiral Markets, GBP/USD order ticket, 13 November 2017

The quote shown in the image is 1.31190/1.31208. We can see that the figures for the last decimal place are smaller than the other numbers. This is to show that these are fractional pips. The difference between the bid and offer is 1.8 pips. If you instantaneously bought and sold at this quote, the pip cost would be 1.8.

If you look at the screenshot below of a different order ticket, you can see that I have selected Modify Order as the Type:

PIP2.png

Image source: MetaTrader 4 platform, pricing from Admiral Markets, GBP/USD order ticket, 13 November 2017.

Note that the Modify Order part of the window has dropdown menus that allow you to select quickly levels that are a certain number of points away. There is therefore an important distinction to be made between points and pips. The points in these dropdowns are referring to the fifth decimal place, in other words, fractional pips that are one tenth of a pip. If you select 50 points here, you will be choosing an order level that is just 5 pips away, for example.

A really good way to familiarise yourself with the pips in Forex prices is to play around with the MT4 platform using a Demo Trading Account. This allows you to view and trade on live market prices but with zero risk because you are only trading with virtual funds when you use a demo account.

CFD Pips

If you are interested in trading shares, you may be wondering if there is such a thing as a pip in stock trading. Really, there is no usage of pips when it comes to trading shares as there are already ready-made terms for communicating price changes: namely, pence and cents.

For example, the image below shows an order ticket for IBM:

PIP3.png

Image source: MetaTrader 4 platform, pricing from Admiral Markets, IBM order ticket, 13 November 2017

The whole numbers in the quote represent the price in USD and the decimal numbers represent cents. This is readily understood and familiar to your average person. There is therefore no need to introduce a further term, such as pips, though sometimes market jargon may include the generic term tick to represent a movement of the smallest increment possible – in this case, one cent.

Whatever you are looking to trade, whether it is CFDs in Forex or shares, you will want to be using the best platform available. This is why you should try out using MetaTrader Supreme Edition. MTSE is a cutting-edge plug-in for MetaTrader 4 & MetaTrader 5 – if you're using MT's latest version – that offers a much wider selection of indicators and trading tools than the standard version.

Download MT4 Supreme Edition - Forex trading platform

What Are Pips in Forex: Summary

You should now have the answer to the question of what a pip is in trading. Being conversant with the unit of measurement for changes in FX rates is an essential first step on the path to becoming a proficient trader. We therefore hope this article has given you a sound footing from whence to continue your journey. If you enjoyed this discussion of FX pips in investing, why not take a look at our article on What Are The Best Currency Pairs to Trade.



Risk Warning

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.