What Is a Pip in Forex? Using Pips
If you are interested in Forex you have likely come across the term 'pip' or 'pips', a very common concept in Forex trading. But what is a pip in Forex? This article will address what a pip is in forex trading, explaining the meaning of Forex pips and how useful a concept it is when trading Forex.
Table of Contents
Forex Pip: An Introduction
What is a pip in Forex trading? A Forex 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 Forex pip was effectively the smallest increment in which an FX price would move, although with the advent of more precise methods of pricing, this original definition of a Forex pip no longer holds true.
Traditionally, FX prices were quoted to a set number of decimal places – most commonly four – and, originally, a Forex pip was a one-point movement in the final decimal place quoted.
The meaning of pips in Forex has changed slightly. Many brokers now quote Forex prices to an extra decimal place; however, this means that a pip in Forex is frequently no longer the final decimal place within 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 of the Forex pip, there would be a risk of comparing apples to oranges, when talking in generic terms such as points or ticks. This is a basic answer to the question, 'what are pips in Forex?'.
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How To Calculate the Value of a Pip
The next step in answering the question, 'what are pips in Forex?' and understanding the meaning of pips, is to understand how to calculate Forex pips. For most currency pairs, one Forex pip is a movement in the fourth decimal place. The most notable exceptions are those pips in Forex pairs involving the Japanese Yen. For pairs involving the JPY, one pip is a movement in the second decimal place. The Forex pip points table below shows Forex pips rates for some common currency pairs.
To further understand the meaning of pips, let's look at an example of a Forex pip. Multiplying your position size by one pip will answer the question of how much a pip is worth. For example, let's say that you want to trade the EUR/USD currency pair, and you decide to purchase one lot.
One lot is worth 100,000 EUR. Here, one pip is 0.0001 for EUR/USD. The currency value of one Forex pip for one lot is therefore 100,000 x 0.0001 = $10. Hence, we can calculate that the profit or loss will be $10 per pip for this forex pair.
Here's a simple example of a pip in Forex to illustrate the pips meaning:
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 a profit of $10. If we work through these sample numbers from a different angle, we can further illustrate the answer to, 'what is a pip in Forex?'.
Let's look a more detailed example of Forex pip in trading.
Example of a Forex Pip in Trading
Let's say that you opened your position at 1.16650, and you bought one contract. This is equivalent to buying 100,000 EUR. Notionally, you are selling dollars to purchase Euros. The value of the dollars that you are notionally selling is naturally dictated by the exchange rate.
For example:
- 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 now selling the Euros and buying the Dollars.
- EUR 100,000 x 1.16660 : USD/EUR = USD 116,660
- That means that 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.
Are you still struggling with the answer to the question, 'what are pips in Forex?' Don't worry. It may feel complicated at first, but this is natural. In fact, this trading Forex pips value is consistent across all FX pairs that are quoted to four decimal places.
A movement of one Forex 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 - the first-named currency).
A move of 10 pips in Forex is worth 100 units of the quote currency. A move of 100 pips in Forex is worth 1,000 units of the quote currency, and so on.
If you would like to learn more about Forex quotes, you can do so by reading the following article: Understanding and Reading Forex Quotes
Currencies 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 Forex pips for such pairs are therefore governed by the second decimal place.
So, let's take a look at how Forex pips are calculated with the USD/JPY currency pair: If you sell one lot of the USD/JPY, a downward move of one FX pip in the price will enable you to earn 1,000 yen.
Let's work through an example of such a pip in Forex to see why:
The USD/JPY Currency Forex Pip Example
- Suppose that you sell two lots of the USD/JPY currency pair at 113.607. One lot of the USD/JPY is worth 100,000 USD. You are therefore selling 2 x 100,000 USD = USD 200,000 in order to purchase: 2 x 100,000 x 113.607 = 22,721,400 JPY.
- Let's say the price moves against you and you decide to cut your losses. You close out at 114.107. One Forex pip for the USD/JPY is a movement in the second decimal place. The price has moved against you by 0.50, or 50 pips.
- You proceeded to close your position by purchasing 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 100,000 JPY more than your original sale of Dollars gave you, so you have a shortfall of 100,000 JPY.
- Losing 100,000 JPY for a 50-pip movement means that for each Forex pip you lost 100,000/50 = 2,000 JPY. Since you sold 2 lots, this is a pip value of 1,000 per lot.
If your account is denominated in a currency that is different to the quote currency, it will affect the Forex pip value. You can use our Trading Calculator to calculate forex pip values and profits with ease. This information above covers most of the basics of the answer to, 'what is a pip in Forex trading?'.
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Forex Pip: What Does it Stand For?
Now that we've answered the question, 'what is a pip in Forex?', let's answer another question, 'what is the meaning of pip?'. Some say that the "pip" meaning in Forex 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 meaning of pip, they allow currency traders to discuss 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 provides us with the most basic answer to what is a pip in currency trading – it is much easier to say ''cable has risen 55 pips'', for example, than to say ''it's increased by 0.0055''.
Let's take a look at how to read pips in MT4 and how Forex prices appear in MetaTrader 4 (MT4) to further answer the question 'what is a pip in Forex?'.
Counting Forex Pips in MetaTrader
The image below shows an 'Order' screen for the GBP/USD currency pair in MetaTrader 4:
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 Forex pips. The difference between the bid and the 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 the selected 'Type' is 'Modify Order':
When learning how to read pips in MT4, note that the Modify Order part of the window contains drop-down menus that allow you to quickly select 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 drop-downs are referring to the fifth decimal place, in other words, one-tenth of a pip.
If you select 50 points here, you will be choosing an order level that is just 5 Forex pips away.
Testing the MT4 platform with a demo account is an excellent way to become acquainted with pips in Forex prices. Because you are only trading with virtual funds, your capital is not at risk when using this account to view and trade on live market prices.
CFD Pips in Forex
So far, we've focused on the question, 'what are pips in Forex?'. If you are interested in trading shares, you may be wondering if there is such a thing as a pip in trading stocks. There is no term 'pips' in trading shares because this market uses other terms for communicating price changes: 'pence' and 'cents'.
For example, the image below shows an order ticket for IBM:
The whole numbers in the quote represent the price in USD and the decimal numbers represent cents. This is readily understood and familiar for most traders.
Therefore, there is no need to introduce any other terms, such as pips in Forex, though sometimes market lingo may include a generic term such as 'tick', to represent a movement of the smallest increment possible – in this case, one cent. This is similar to a pip in Forex.
Final Words
Now that you understand the pip meaning and have an answer to the question of 'what a pip is in Forex trading?', we wish you luck in your Forex journey!
Understanding this unit of measurement for changes in FX rates is an essential step on the path to becoming a proficient trader. If you enjoyed this discussion about the meaning of pips in Forex and what are pips in Forex, why not take a look at our article on the best currency pairs to trade in Forex?
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- What is the Most Profitable Forex Indicator?
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- How to Trade with MetaTrader WebTrader
Frequently Asked Questions
What is a Pip in Trading?
A pip, short for "percentage in point" or "price interest point," is a unit of measurement used to express the change in value between two currencies. In most currency pairs, a pip is equivalent to a one-digit movement in the fourth decimal place of the exchange rate. For example, if EUR/USD moves from 1.1050 to 1.1051, that's a one pip change.
How are Pips Calculated?
Pips are calculated based on the movement of the currency pair. For most pairs, a pip is the smallest change in the fourth decimal place, which is 0.0001. However, for pairs involving the Japanese Yen (like USD/JPY), a pip is in the second decimal place, or 0.01. To calculate the value of a pip, you multiply the amount of the trade by the pip movement. For example, in a 10,000 unit trade of EUR/USD, a one pip move equals $1.
Why are Pips Important in Forex Trading?
Pips are crucial in forex trading as they help traders to quantify the gains or losses on a trade. By understanding pips, traders can better manage their risk and set precise stop-loss and take-profit orders. Pips also provide a universal language for traders to discuss price movements and strategies, ensuring clear communication in a global market.
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