PIP

Introduction to Pips

If you’re new to trading—especially forex or crypto—you’ve probably heard the term “pip” thrown around often. But what exactly is a pip, and why does it matter so much in trading? In this guide, we’ll break down what a pip is, how to calculate it, and how it affects your trading strategy.

What is a Pip?

Pip stands for “percentage in point” or “price interest point.” It represents the smallest price movement that a currency pair or asset can make based on market convention. In most forex pairs, a pip is equal to 0.0001 (1/100th of a percent). For Japanese yen pairs, it’s 0.01.

Examples:

• EUR/USD moves from 1.1050 to 1.1051 = 1 pip
• USD/JPY moves from 140.00 to 140.01 = 1 pip

Pipettes (Fractional Pips)

Some brokers use fractional pips, called pipettes, to offer tighter spreads and more precise quotes. A pipette is one-tenth of a pip, or 0.00001 in most currency pairs. You may see prices quoted to the fifth decimal place, such as 1.10503.

Why Are Pips Important?

Pips are critical for calculating:

• Profit and loss
• Risk-to-reward ratios
• Stop-loss and take-profit levels
• Spreads (the cost of trading)

In short, pips are how traders measure market movement and performance. They provide a universal language for price fluctuation and risk control.

How to Calculate the Value of a Pip

The value of a pip depends on the currency pair, the trade size (lot size), and the base currency of your trading account.

Standard Pip Value Examples:

In a standard lot (100,000 units):

• 1 pip in EUR/USD = $10

In a mini lot (10,000 units):

• 1 pip = $1

In a micro lot (1,000 units):

• 1 pip = $0.10

To calculate pip value manually:

Pip Value = (1 pip / Exchange Rate) × Lot Size

Or you can use online pip calculators provided by most brokers.

Pips vs Points vs Ticks

• Point: In some markets, a point means a full unit change (e.g., 1.1200 to 1.1300 = 100 points)
• Pip: Typically 0.0001 in most forex pairs (or 0.01 in JPY pairs)
• Tick: The smallest possible price movement in a market. In stocks, this could be $0.01; in futures, it varies by contract.

Using Pips in Risk Management

Pips are essential in defining your trading strategy and managing risk effectively. Traders use pips to:

• Set stop-loss and take-profit levels
• Calculate position size before placing a trade
• Evaluate and refine risk-to-reward ratios

Example:

If your account risk per trade is $100 and your stop-loss is 50 pips, then your pip value should be $2 per pip. That means you would trade 0.2 lots (mini lots) on EUR/USD.

Conclusion

Though it may seem small, the pip is a critical concept in trading. It determines how profits and losses are calculated and how strategies are executed. Mastering pip values and how they relate to lot sizes, leverage, and risk can set you apart as a disciplined and informed trader.

As you move forward in your trading journey, always keep an eye on pip calculations. They are the foundation of every trade, every win, and every learning experience in the market.