What is a pip in trading? How are they calculated? How could they affect trading outcomes? Our complete beginner’s guide to pips answers all these questions and more, taking a deep dive into the role of pips in price movements, examining how pips impact both spreads and trading costs, and the role of pips in trading with forex and CFDs.
What Are Pips in Trading?
Understanding pips, pip value and their role in calculating potential profit and loss should be essential learning for any trader. Short for “percentage in point” or “price interest point”, pips are commonly used by day traders in forex trading where a pip represents the smallest standardised unit of price movement used to establish the price of a currency pair.
With major currency pairs commonly priced to four decimal points, this may refer to a 0.0001 shift in pricing, which is equivalent to one pip. For currency pairs that use less decimal places such as the Japanese yen (JPY), the pip value would equal the smallest possible price movement, i.e. two decimal places (0.01).
The pip defines the increase or decrease in value between two currencies, which directly relates to trading profits and losses depending on the direction of market movement.
As spreads are often quoted in pips, traders can use this information to calculate spreads between the bid and ask prices of their chosen currency pairs to determine relative profit and loss. Pips are also frequently used in CFD trading.
Why Are Pips Important in Forex Trading?
Pips are an essential tool for forex traders to use to calculate gains and losses. Profits and losses are calculated using the number of pips, the pip value and the number of lots. Lot size will depend on factors including previous trading experience and risk appetite as well as the volatility of the chosen currency pairs.
Pips are also valuable as a standardised measurement of price fluctuations in the forex market. Traders can use them to track specific currency pairs and as a type of universal communication tool where traders in different locations all speak the same financial language and compare currency pairs using a standardised tool.
Trading platforms also use this universal language of pips to communicate about price movements and live market news, supporting a transparent trading process and more streamlined strategic decisions.
This type of standardised communication makes it easier to understand the impact of pips (the bigger the lot, the bigger the risk) and to effectively integrate pip values into a risk-managed strategy. It also makes it quick and easy to understand stops, targets and position sizing which all are calculated in pips.
Forex trading involves trading in a fast-moving, sometimes unpredictable market and pips can support traders in understanding the true measure of gains and losses with regards to leverage and the wider market context.
How to Calculate Pips Manually and Automatically
Learning how to calculate pips is an important stage in forex trading education. We can determine the pip value by using the following guidelines.
The value of each pip is determined by the specific currency pair and the size of a trade, otherwise known as a lot.
- Beginner traders usually trade with micro lots equal to 1000 units of base currency, in turn equivalent to around USD $0.10 per pip.
- Intermediate traders typically take out mini lots, equal to 10,000 units and around USD$1 per pip.
- Standard lots comprise 100,000 units of base currency and are typically associated with more experienced traders where a pip value represents around USD$10 per pip (if the account is in USD.
2. Pip value is used to determine the level of risk per pip movement.
3. Profits and losses are calculated by multiplying the numbers of pips by the pip value and the number of lots.
To calculate pips on a forex trade, you will then subtract the entry price from the exit price and multiply the result by 10,000 (or 100 for JPY pairs) to convert to pips. In other words, for currency pairs where the quote current is not USD, the following formula applies:
Pip Value = (0.0001 / Exchange Rate) * Trade Size.
For currency pairs where JPY is the quote currency, the following formula should be used:
- Pip Value = (0.01 / Exchange Rate) * Trade Size
For currency pairs where the quote currency is USD, the pip value is as follows:
- Pip Value = 0.0001 * Trade Size
Pip value is impacted by four key factors: the size of the lot, the chosen currency pairs, the exchange rates on these currency pairs and the use of leverage (where relevant).
While it’s useful to understand how to calculate pips manually, many of the top broker platforms include integrated, user-friendly tools to support automatic calculations and expedite the trading process.
This might involve pip calculation tools embedded into software programs such as MetaTrader 4 and MetaTrader 5 as well as/or dedicated pip calculator features offered by the broker platform itself.
Examples of Pips in Trading Action
When we consider pips meaning in trading, it is essential to look at pips in action. The following examples demonstrate how pip movement results in profit or loss, depending on the chosen currency pair, lot size, and entry/exit prices.
It is useful to begin with an example of profit associated with the most popular major currency pair – EUR/USD.
- EUR/USD on Standard Lot
This example considers trading with a standard lot size of 100,000 units and an entry price of 1.1000. The exit price is 1.030 which means pip movement of 30 pips at a value of $10 per pip. This results in a profit of $300 because the price increased by 30 pips after you entered the market with a price of 1.1000.
Profit: 30 pips × $10 = $300
We can also look at an example of loss using the AUD/USD currency pair.
- AUD/USD on Standard Lot
This example considers the trader taking up a short position with a standard lot size of 100,000 units and an entry price of 0.6650. With an exit price of 0.6690, this trade sees pip movement of 40 pips against the trader. At a value of $10 per pip, this means a loss of $400
Loss: 40 pips × $10 = −$400.
We can also consider profit and loss on a micro level for less experienced traders.
- EUR/USD on Micro Lot
This trader takes up a long position with a micro lot (1000 units) and an entry price of 1.1000. Pip movement of 25 pips at a value of $0.10 per pip means an exit price of 1.1025. This means a $2.50 profit on a 25-pip move
Profit: 25 × $0.10 = $2.50.
Our final example illustrates pip movement involving the Japanese Yen (JPY).
- USD/JPY on Mini Lot
This trader takes up a long position on a lot size of 10,000 units (mini lot). With an entry price of 157.50 and an exit price of 157.80, this translates to pip movement of 30 pips (when we acknowledge that JPY pairs are quoted to two decimal places). With a pip value of $0.90 per pip, this trade makes a $27 profit.
Profit: 30 pips × $0.90 = $27.
Pips vs Points vs Ticks: What’s the Difference?
Pips, points and ticks are all terms used to describe tools that measure incremental price movements and changes across the financial markets. However, it is the context in which they are used that is the main differentiator.
Pips
Pips are standardised for currency pairs and used to measure price movements in the forex market and as a tool to calculate profit and loss. They can also be used to understand price movements more precisely in relation to leverage and wider market activity.
They are standardised across the global markets to measure changes in value between two currencies, representing one unit of the fourth decimal place of the exchange rate (or the second decimal place for JPY).
Points
Points are a more general term, predominantly applied to trading with stocks and indices but also used in trading on the futures and options markets. Points refer to the smallest whole number price change (in dollars) on the left side of the decimal point.
The dollar value of a point varies by contract, exchange and market. Overall, one point equals one unit of movement in the price of an asset – a USD$1 price change in the stock market or one index unit in relation to indices. In futures contracts, points have a standardised monetary value depending on the product.
Ticks
Ticks are the smallest possible measure of price movement, typically used in futures trading and the stock market representing price changes on the right side of the decimal. The size of a tick is not set in stone – instead, it is defined by the individual exchange or product with a defined number of ticks required to increase or decrease contract value by a point. The tick value therefore depends on the asset which means the ticks may not measure every incremental price movement equally.
We can look at different examples of ticks in the futures market to see how they are calculated:
- 1 tick on E-mini S&P 500 (ES) Futures is equal to 0.25 index points and the tick value equals $12.50 per contract.
- With Gold Futures (GC), tick size is 0.10 (10 cents per ounce) with the tick value defined as $10 per contract (100 oz per contract × $0.10).
How Pips Affect Spreads and Trading Costs
Pips are an essential language for every trade to speak because they provide a good level of transparency when it comes to cost calculations. Brokers will quote spreads in pips to help traders understand the real cost of entering – and exiting - a trade.
As the difference between the bid price and ask price of a currency (the spread) is measured in pips, this clearly demonstrates the upfront cost of a trade and the price that must be paid to break even, and before the trade can become profitable. This is especially relevant to day traders or scalpers aiming to capture small price movements, as high spread costs can quickly impact profits and therefore need to be considered within a wider strategic approach.
Pips provide this knowledge and information on-the-go in easily accessible format to support traders in achieving their goals and minimise the risk of unexpected or overlooked trading costs.
FAQs – All About Pips in Trading
What is the definition of a pip in forex trading?
A pip is the standard unit for measuring price movements in forex trading, usually represented as a movement in the fourth decimal place (0.0001). The pip determines the changing values between two currencies, allowing traders to calculate profit and loss.
How do you calculate pips on a trade?
Pips may be calculated automatically using in-built tools on broker platforms and/or software such as MetaTrader 5. There is also a formula for manually calculating pips, where you must subtract the entry price from the exit price and multiply the result by 10,000 (or 100 for JPY pairs) to convert to pips. The formula may vary slightly depending on the chosen currency pair which is why automatic pip calculators are beneficial for the highest level of precision in defining pip value.
What does pips mean in day trading?
Pips refer to the standardised unit of measuring price movements between currency pairs. They help day traders to track and analyse small price fluctuations throughout the day, and aim to profit from small, high-frequency price movements.
How many pips is good for a day trade?
While this will vary in line with your chosen trading strategy and currency pairs as well as wider market conditions such as volatility, traditional day traders with a strategic, risk-conscious approach typically aim for 20 to 50 pips per trade.
This considers the fact that pip movement is strongly influence by the relative liquidity of currency pairs which can see trades move by anything from 40 to 120 pips per day.
Day traders will typically be looking for a level of consistency in their risk/reward setup which may not involve aiming for a specific range of pip movement but more an overall balanced approach that accommodates their trading ambitions and accounts for the potential for pip movement.
Are pips used in crypto or stock trading too?
Pips are not used in stock trading, with price movements instead measured in points. They are, however, used in crypto trading to support traders in working out profit and loss, and to build an informed risk management strategy.
What’s the difference between pips and ticks?
While both pips and ticks refer to tools used to measure price movements in the financial markets, there are some key differences. Pips are exclusively used in reference to currency pairs and forex trading while they are also a standardised tool making them a key part of the global financial conversation.
Ticks are used most commonly on the futures and options markets as well as some stock markets. Unlike the standardised value of pips, ticks’ size and value varies depending on the asset and exchange being traded on.
Can I use a pip calculator?
While there are manual formulas for calculating pip value and subsequent profits and losses, pip value can still vary especially when it comes to currency pairs including the Japanese Yen (JPY or non-USD accounts. A pip calculator is therefore an extremely valuable tool to help traders confirm the exact value based on the chosen account currency and specific pair.
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