Pips in trading terms refer to the smallest unit of change that can occur in the exchange rate between any currency pair. 'Pip' stands for a percentage in point or price interest point. It’s typically the fourth decimal place in the exchange rate, although this varies.
It’s a crucial figure in Forex trading, since this is how you can work out the potential profit or loss of a trade. By using a Forex pip calculator, you can control your risk management approach and profit targeting.
Pips Meaning: What Are Pips in Forex Trading
The pips definition in a Forex context refers to the unit of measurement in price movements on currency pairs. The value of a pip depends on the pair to be traded, the lot size and the exchange rate. Any leverage being used also needs to be taken into account.
The pips value is always calculated on the quoted price rather than the base price. This means that it’s based on the second currency listed in the pair.
How to Calculate Pips in Forex Step-by-Step
The EUR/USD pair is calculated to the fourth decimal place, giving us the following examples.
- A change from 1.1239 to 1.1238 would be a single pip change.
- From 1.1313 to 1.1353 would be 40 pips.
The USD/JPY pair classifies the second decimal place as a pip.
- From 143.01 to 143.02 would be a single pip change.
- From 143.10 to 143.70 would be 60 pips.
Using these examples, we can then see how the pips meaning helps us to see how the size of the price movement relates to our profit or loss figure.
- Use the following formula: Pip Value = (Pip Movement x Position Size) / Exchange Rate
- In the case of a pair where the fourth decimal place is used, we can see a EUR/USD example where the standard lot size of 100,000 is used
- This gives us 100,000 x 0.0001 = $10. So, each pip is worth $10 in this example.
- In the example above, a single pip movement has a value of $10. The second example with a 40 pip movement would lead to a profit or loss of $400.
- If leverage is used, we need to multiply the result above by the amount of leverage.
Therefore, the same pip value calculator can be used in any trade, just by swapping in the correct values for the currency pair, the lot size, and the leverage.
Using a Forex Pip Calculator and Other Tools
Calculating the pips in a trade isn’t particularly difficult. However, it’s vital that you get it right to understand the potential size of a profit or loss. This is why a Forex pips calculator provides a safe way to always get the right number.
These tools are simple to use, as you just need to enter the details we’ve looked at here. It will then work out the cash value of the number of pips. This is a trustworthy way to use a pip profit calculator and avoid the risk of calculating the number incorrectly.
How to Use Pips in Forex Trading Strategies
Understanding pips in Forex allows you to work out accurately how much the eventual profit or loss on a trade would be. This lets you assess the right trade size to enter into, as well as the risk-reward ratio.
The value of trading pips in the operation can also be used to calculate what stop-profit and take-profit levels you should be looking at. In this way, you can be consistent in your use of trading strategies.
Start Trading with Pip Awareness at ActivTrades
This look at pips in trading is just one of the ways that ActivTrades supports you when you start Forex trading. You can get started with a demo account and use leading platforms such as MetaTrader 4, MetaTrader 5, ActivTrader and TradingView.
You can also read our extensive range of guides for practical advice. Once you’re ready to start trading with Forex pips, we’ve got competitive spreads that make it easier to manage your trades more effectively.
Forex Pips Meaning & Forex Pip Calculator FAQs
What Is a Pipette in Forex Trading?
While a pip is usually based on the fourth decimal place, a pipette is sometimes used to measure price movements in the fifth decimal place.
What Currency Pairs Use the Second Decimal Place in Forex Pips?
Some currency pairs, including the Japanese yen, are based on price movements in the second decimal place.
Does Leverage Affect the Pip Profit Calculator?
Yes, the amount of leverage being used in the trade is one of the factors that need to be taken into account when calculating your strategy.
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