A pip (short for “percentage in point”) is the standard way traders measure changes in currency prices in forex trading. It represents the smallest movement a currency pair’s price can make based on market conventions. For most currency pairs, 1 pip = 0.0001. This means if a price moves from 1.1000 to 1.1001, it has changed by 1 pip. In pairs involving the Japanese yen (JPY), a pip equals 0.01 instead.
Key Facts: Pip in Forex Trading
- A pip represents the fourth decimal place for most pairs (0.0001)
- JPY Pairs use different Pip Sizes (0.01)
- Pip Value Formula: Pip Value = (Pip Size / Exchange Rate) × Position Size
- Loss and Profit Pip Formula: Profit/Loss = Pip Value × Number of Pips Moved
How to Calculate Pip in Forex Trading?
Calculating a pip in forex trading is straightforward once you understand the basic rules and formula. A pip represents the fourth decimal place for most pairs (0.0001) or the second decimal place for Japanese yen pairs (0.01).
To calculate the value of a pip, you need to know the size of your trade (known as the lot size) and the exchange rate of the currency pair. The formula looks like this:
Pip Value = (Pip Size / Exchange Rate) x Position Size
Example: Calculating Pip Value for EUR/USD
Let’s assume the EUR/USD exchange rate is 1.05 (Exchange Rate), and you’re trading a standard lot size of 100,000 units (Position Size). The pip size for EUR/USD is 0.0001 (Pip Size). Inputting the numbers in the formula would look like this:
Pip Value = (0.0001/1.05) × 100,000
Step-by-Step:
1. Start with the formula and Substitute the values:
Formula: Pip Value = (Pip Size / Exchange Rate) × Position Size
Inputted Numbers: Pip Value = (0.0001 / 1.05) × 100,000
2. Divide the pip size by the exchange rate:
0.0001 / 1.05 = 0.0000952
3. Multiply this result by the position size:
0.00009528 × 100,000 = 9.53
This means for every 1-pip movement in EUR/USD, your trade value changes by $9.53.
Example: Calculating Pip Value for USD/GBP
Let’s take another popular forex pair USD/GBP, and calculate the pip value. The current rate for this pair is 1 USD to 0.79 GBP. So, inputting the values will give this result:
Step-by-Step:
1. Substitute the values:
Pip Value = (0.0001 / 1.27) × 100,000
2. Divide the pip size by the exchange rate:
0.0001 / 1.27 = 0.00007874
3. Multiply this result by the position size:
0.00007874 × 100,000 = 7.87
So, the pip value for USD/GBP with these inputs is $7.87 per pip.
What Are the Special Characteristics of the Calculation of Pips?
Pip calculations vary slightly depending on the currency pair being traded and the trading environment. While the basic formula remains consistent, there are a few key characteristics that make pip calculations unique for specific scenarios.
JPY Pairs Use Different Pip Sizes
Most currency pairs have 1 pip equals 0.0001. However, for pairs involving the Japanese yen, 1 pip equals 0.01 because the yen is quoted with two decimal places instead of four.
Example: Calculating Pip Value for USD/JPY
Let’s calculate the pip value for USD/JPY, assuming the exchange rate is 1 USD = 153.60 JPY, the pip size is 0.01, and the position size is 100,000 units. Follow these steps:
- Step 1: Use the formula:
Pip Value = (Pip Size / Exchange Rate) × Position Size - Step 2: Substitute the values:
Pip Value = (0.01 / 153.60) × 100,000 - Step 3: Divide the pip size by the exchange rate:
0.01 / 154.00 = 0.0000651 - Step 4: Multiply the result by the position size:
0.00006494 × 100,000 = 6.51
This means that for every 1-pip movement in USD/JPY, the trade’s value will increase or decrease by $6.51, depending on the direction of the price change.
Exotic Pairs: What Are They and Why Are They “Exotic”?
Exotic currency pairs are made up of one major currency, such as USD, EUR, or GBP, paired with a currency from an emerging or smaller economy. Examples of exotic currencies include the Turkish lira (TRY), South African rand (ZAR), and Thai baht (THB).
Why Are They Called Exotic?
Exotic pairs are considered “exotic” not because they’re rare but because they involve currencies that are less commonly traded and less liquid compared to the majors – EUR/USD, GBP/USD. Here are the main characteristics of exotic currency pairs.
- Low Liquidity: Exotic pairs have fewer buyers and sellers in the market, making them less liquid than major or minor pairs.
- Higher Spreads: Due to their low trading volume, brokers often charge higher spreads for exotic pairs, increasing transaction costs.
- Volatility: Exotic currencies can be highly volatile, with significant price swings caused by geopolitical events, economic instability, or low market activity.
- Economic Factors: Exotic currencies are often from economies that are still developing, with less stable monetary policies or more exposure to political risks.
Here are the Steps to Calculate the Pips for an Exotic Currency Pair:
Calculating the pip value for an exotic currency pair follows the same basic process as with major pairs. The formula doesn’t change, but exotic pairs often involve higher exchange rates, which can make the pip value smaller. Here’s how you can calculate it step by step:
- Step 1: Use the formula:
Pip Value = (Pip Size / Exchange Rate) × Position Size - Step 2: Substitute the values:
Pip Value = (0.0001 / 34.00) × 100,000 - Step 3: Divide the pip size by the exchange rate:
0.0001 / 34.00 = 0.000002941 - Step 4: Multiply the result by the position size:
0.000002941 × 100,000 = 0.29
So, the pip value for USD/TRY at this exchange rate is $0.29 per pip.
Why Is the Measurement Pips Used in Forex Trading?
Pips are used in forex trading because they provide a simple and consistent way to measure price changes across all currency pairs. Without them, tracking movements in the market would be difficult since currencies are priced differently. By using pips, traders can easily calculate profits, losses, and risk, no matter which pairs they are trading.
Instead of saying, “The EUR/USD moved from 1.1000 to 1.1010,” you can simply say, “The price moved 10 pips.” This makes communication clearer and avoids confusion. Other benefits of using pips in forex are:
- Simplifies Risk Management: Pips are used to set stop-loss and take-profit levels, allowing traders to control how much they are willing to risk or gain on a trade.
- Standardizes Profit and Loss Calculations: Knowing the pip value for a position makes it easy to calculate potential profits or losses for a given price movement.
- Universal Communication: Pips provide a shared language for traders worldwide, making it easier to discuss strategies or analyze market moves without confusion.
- Works Across All Currency Pairs: When trading a major pair like EUR/USD or an exotic pair like USD/TRY, pips provide a consistent way to measure price changes.
- Helps Compare Movements: Pips allow traders to compare volatility and price changes between currency pairs, even if their pricing structures are very different, for example, EUR/USD vs. USD/JPY.
What Is the Best Way to See Pips in Your Trading Platform?
The best way to track and calculate pips in a trading platform is by using tools and automated features available within platforms like MetaTrader. MetaTrader, both MT4 and MT5, comes with built-in tools and supports additional plugins that make tracking pips straightforward and efficient.
MetaTrader’s built-in crosshair tool lets you easily measure the pip difference between two price points on a chart. Many plugins, such as pip counters and position size calculators, are available to automate the process. These tools display pip movements in real time, calculate pip values for your trades, and even notify you when a certain pip level is reached.
Similar features are available for traders who use other platforms, such as cTrader or TradingView. These platforms also support automated pip calculators, price-tracking tools, and customizable indicators to simplify the process.
Automated tools, regardless of the platform, are the most effective way to measure and monitor pips. They save time, reduce the chance of calculation errors, and help you focus on making trading decisions rather than performing manual calculations.
How to Calculate Loss and Profit With the Pips Value?
Calculating your profit or loss in forex trading is simple once you know the pip value for your trade. By multiplying the pip value by the number of pips the price moves, you can determine how much money you’ve gained or lost on a position.
Here’s a simple formula:
Profit/Loss = Pip Value × Number of Pips Moved
Example 1: Calculating Profit for EUR/USD
Assume you buy EUR/USD at 1.04972, and the price rises to 1.05022, a movement of 50 pips in your favor. From earlier, we calculated the pip value for EUR/USD with a standard lot size (100,000 units) as 9.43 USD per pip.
Profit = Pip Value × Number of Pips Moved
Profit = 9.53 × 50
Profit = 476.50 USD
You would have earned $476.50 from this trade.
Example 2: Calculating Loss for USD/JPY
Now, you sell USD/JPY at 153.72, but the price moves against you to 154.22, a movement of 50 pips. Earlier, we calculated the pip value for USD/JPY with a standard lot size of 6.51 USD per pip.
Loss = Pip Value × Number of Pips Moved
Loss = 6.51 × 50
Loss = 325.50 USD
In this case, your loss would be $325.50.
How Does the Lot Size Influence the Pip Values?
The lot size in forex trading directly determines the monetary value of each pip. A standard lot (100,000 units) has the highest pip value, $10 per pip, while a micro lot (1,000 units) lowers it further to $0.10 per pip. Forex traders mainly use four lot types based on their stratergy, currency pair, and risk tolerance.
| Lot Type | Lot Size | Volume | Pip Value in USD |
|---|---|---|---|
| Standard | 100,000 | 1 | $10 |
| Mini | 10,000 | 0.10 | $1 |
| Micro | 1,000 | 0.01 | $0.10 |
| Nano | 100 | 0.001 | $0.01 |
This means that larger lot sizes increase both your potential profits and your potential losses for every pip the price moves. For example, if EUR/USD moves 50 pips, a standard lot trade could gain or lose around $471.50, while a mini lot would result in only $47.15.
Therefore, adjusting lot size is important as part of managing your risk management – traders often choose smaller lot sizes to limit their exposure in volatile markets or while learning.
Conclusion
Understanding pips is fundamental to forex trading, and without understanding them, it’s unlikely you’ll succeed in the currency market. Pips provide a standardized way to measure and communicate price movements across all currency pairs, simplifying calculations for profits, losses, and risks. Knowing how to calculate pip values and understanding how lot size influences these calculations are required for effective trading.
We’ve gone over how to calculate pip values with any currency pair, but to save time, we at WR Trading highly recommend using a forex pip calculator. This will save you time and eliminate the chances of you making mistakes when doing the maths. Also, you can integrate plugins or tools within your trading platform to get real-time and accurate prices in the form of pips.
Frequently Asked Questions:
What Is a Pip in Forex Trading?
A pip is the smallest price movement in a currency pair based on market convention. For most pairs, one pip equals 0.0001, while for Japanese yen pairs, one pip equals 0.01. It standardizes how traders measure price changes across currencies.
Why Are Pips Important in Forex Trading?
Pips simplify how traders track and communicate price changes, making calculations for profits and losses easy. They also help traders set precise stop-loss and take-profit levels for risk management. Without pips, comparing currency movements would be inconsistent and confusing.
How Is a Pip Different From a Pipette?
A pipette is one-tenth of a pip, providing even finer precision in pricing. While a pip is 0.0001 for most pairs, a pipette is 0.00001. Brokers often use pipettes to display prices with more accuracy for high-frequency or automated trading.
How Do You Calculate the Value of a Pip?
The pip value depends on the currency pair, position size, and exchange rate. The formula is: Pip Value = (Pip Size / Exchange Rate) × Position Size. This value tells you how much a 1-pip movement affects your profit or loss in monetary terms.
What’s the Easiest Way to Track Pips?
Using platforms like MetaTrader is the simplest way, as they automatically display pip values and price movements. Features like crosshair tools and plugins make pip tracking effortless. Other platforms also offer built-in pip calculators and customizable indicators.
