Pip in Currency Trading: The Fundamental Basis Every Trader Must Know

For those who are just beginning to take an interest in the currency trading market, the term “pip” might sound like a complicated technical term. But in reality, it is the fundamental unit that traders need to understand deeply because pip is the key to planning trades, managing risk, and tracking your overall results.

What is a Pip in Currency Trading?

Pip (Price Interest Point) refers to the measurement unit that indicates the change in price between any two currencies. It is the smallest decimal movement in the exchange rate.

To clarify, suppose the EUR/USD currency pair moves from 1.0614 to 1.0615. This 0.0001 change is called 1 pip. For most currency pairs like this, a pip is at the fourth decimal place.

However, not all currency pairs operate the same way. Currency pairs involving the Japanese Yen (JPY) are an important exception. For USD/JPY, the pip is a change at the second decimal place (0.01). For example, moving from 126.68 to 126.69 is a 1 pip movement for this pair.

Furthermore, many brokers display prices in “fractional pips” by adding a fifth decimal place, allowing traders to see movements smaller than 1 pip. For example, a price of 1.06154 has a ‘4’ at the end, which equals 0.4 pip.

What Does Pip Mean for Trading Performance?

Once you understand how pip works, you’ll see that it is vital for profit and risk management.

Example 1: Trading EUR/USD with a Standard Lot

If you open a long position of a standard (100,000 units) of EUR/USD at a price of 1.1000, and the price moves to 1.1050, you gain 50 pips. Since each pip in a standard EUR/USD position is worth $10, your total profit is 50 × 10 = $500. Conversely, if the price drops by 50 pips, you lose $500.

Example 2: Risk Assessment

Suppose you decide to risk a maximum of $100 per trade, and you use a mini lot (10,000 units), where 1 pip = $1. You can set a Stop-Loss 100 pips away from entry point and aim for a profit target of 200 pips (risk-reward ratio = 1:2). This approach helps you establish a clear and systematic risk management framework.

How to Calculate Pip Value in Different Scenarios

Calculating Pip for USD Account

If your account currency is USD and you trade currency pairs with USD as the second currency (such as EUR/USD, GBP/USD), the pip value remains constant:

• Standard Lot (100,000 units): USD 10 per pip
• Mini Lot (10,000 units): USD 1 per pip
• Micro Lot (1,000 units): USD 0.10 per pip
• Nano Lot (100 units): USD 0.01 per pip

For currency pairs where USD is not the second currency, such as USD/CAD, divide the above pip value by the exchange rate. For example, if USD/CAD = 1.35104, the pip value for a standard lot is approximately 10 ÷ 1.35104 ≈ USD 7.40.

Calculating Pip for Non-USD Accounts

If your account currency is CAD and you trade USD/CAD, the pip value remains fixed at CAD 10 for a standard lot because CAD is the second currency.

For other pairs like AUD/CAD, you need to convert CAD 10 into your account currency by dividing by the EUR/CAD rate (if your account is in euros). For example, if the rate is 1.47421, the pip value is 10 ÷ 1.47421 ≈ 6.78 euros.

Special Case: JPY Pairs

When JPY is the second currency and you divide the pip value by the exchange rate, multiply the result by 100 because JPY uses only two decimal places.

Example: If CAD/JPY = 78.872, the pip value for a standard lot is:

• Calculation: (CAD 10 ÷ 78.872) × 100 ≈ CAD 12.68

Tools and Methods to Calculate Pip

Although the formula for calculating pip value is straightforward, there are easier ways than manual calculation:

Online Pip Calculators: Many websites like MyFxbook and BabyPips offer free pip calculators. Simply input details such as currency pair, lot size, and account currency, and the tool provides instant results.

Trading Platforms: Software like MT4, MT5, and cTrader automatically display pip information, including pip movement, pip value per position, and profit/loss measured in pips.

Indicators and Scripts: MT4 has pip indicators that calculate pip value in real-time, helping traders avoid manual calculations.

Excel Spreadsheets: Advanced traders often create their own spreadsheets using formulas:

• For most currency pairs: Pip value = 0.0001 × position size
• For JPY pairs: Pip value = 0.01 × position size ÷ price

The Role of Pip in Risk Management and Strategic Planning

Consistent Measurement

Pip is valuable because it provides a standard for comparing trading results across different strategies. Making 50 pips profit from EUR/USD may not be the same monetary value as 50 pips from GBP/JPY, but the pip movement ratio is comparable. This helps traders evaluate how effective their strategies are without confusion caused by currency differences and lot sizes.

Disciplined Risk Management

Instead of saying, “I will exit the trade if the market shows a bad signal,” disciplined traders state, “My Stop-Loss is 30 pips.” This removes emotion from decision-making and creates a clear risk management plan.

Long-term Performance Tracking

Professional traders often set average pip goals per trade, such as “My target is an average of 30 pips per winning trade with a 70% win rate.” Tracking pip data over time helps traders identify patterns, refine strategies, and maintain consistency in their trading results.

Summary

Pip is extremely important for Forex and CFD trading because it is the standard unit that measures price movements, profits, and risks. Whether you are a beginner or an experienced trader, understanding how pip works and how to calculate its value will help you set precise Stop-Loss and Take-Profit levels, manage risks more effectively, and evaluate potential returns before entering a trade. With knowledge of pip, you can make clearer decisions and build consistent trading performance.