If you are starting out in foreign exchange trading, one of the most fundamental terms you will encounter is a pip. Short for Percentage in Point or Price Interest Point, a pip is the standard unit of measurement used to quantify the change in value between two currencies.
Understanding what a pip is and knowing how to calculate its monetary value is critical for managing risk, setting proper stop-loss levels, and calculating overall profits and losses.
What is a Pip?
A pip represents the smallest standardized price movement that a conventional exchange rate makes.
For the vast majority of currency pairs, a pip is equal to 1/100th of 1%, or 0.0001. It is measured at the fourth decimal place of a forex quote.
EUR/USD Quote: 1.0855
^
|--- This digit represents 1 Pip
If EUR/USD moves from 1.0855 to 1.0856, it has moved 1 pip. If it rises to 1.0865, it has moved 10 pips.
The Japanese Yen Exception
The primary exception to the 4th decimal place rule involves pairs containing the Japanese Yen (JPY), such as USD/JPY or EUR/JPY. Because the Yen has a much smaller individual unit value relative to other major currencies, quotes are displayed with fewer decimals.
For Japanese Yen pairs, a pip is located at the second decimal place ($0.01$).
USD/JPY Quote: 155.25
^
|--- This digit represents 1 Pip
If USD/JPY moves from 155.25 to 155.35, that represents a 10-pip move.
What is a Pipette? (Fractional Pips)
Modern trading platforms often quote prices beyond standard pips to provide extra precision. These extra digits are called pipettes or fractional pips:
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For standard currency pairs, a pipette is the 5th decimal place ($0.00001$).
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For JPY pairs, a pipette is the 3rd decimal place ($0.001$).
Example: In a quote like EUR/USD = 1.08554, the final small digit (
4) is 4 pipettes (or 0.4 pips).
How to Calculate Pip Values Easily
The actual cash value of a single pip depends on three variables:
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The currency pair being traded.
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The trade size (Lot Size).
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The exchange rate.
Understanding Standard Lot Sizes
Forex trades are executed in standardized volumes known as lots:
| Lot Type | Units of Base Currency | Volume |
| Standard Lot | $100,000$ units | $1.0$ |
| Mini Lot | $10,000$ units | $0.10$ |
| Micro Lot | $1,000$ units | $0.01$ |
Formula 1: When the USD is the Quote Currency (Direct Pairs)
When the U.S. Dollar is the second currency in the pair (e.g., EUR/USD, GBP/USD, AUD/USD), calculating pip value is simple and remains fixed:
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1 Standard Lot ($100,000$ units):
$$0.0001 \times 100,000 = \mathbf{\$10 \text{ per pip}}$$ -
1 Mini Lot ($10,000$ units):
$$0.0001 \times 10,000 = \mathbf{\$1 \text{ per pip}}$$ -
1 Micro Lot ($1,000$ units):
$$0.0001 \times 1,000 = \mathbf{\$0.10 \text{ per pip}}$$
Formula 2: When the USD is the Base Currency (Indirect Pairs)
When the U.S. Dollar is the first currency in the pair (e.g., USD/JPY, USD/CAD, USD/CHF), you must divide by the current exchange rate to convert the pip value into USD:
Example: Calculating Pip Value for USD/JPY
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Exchange Rate: USD/JPY = $150.00$
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Trade Size: 1 Standard Lot ($100,000$ units)
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Yen Pip Location: $0.01$
Practical Example: Calculating Profit & Loss
Let’s look at how pips translate directly to profit and loss on a live trade:
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Trade Setup: You place a Buy (Long) order on EUR/USD at 1.0820 with 2 Mini Lots ($20,000$ units).
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Pip Value: For $20,000$ units of EUR/USD, each pip is worth $2.00 ($0.0001 \times 20,000$).
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Price Movement: EUR/USD rises to 1.0870, where you close the trade.
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Pip Gain: $1.0870 – 1.0820 = \mathbf{50 \text{ pips}}$.
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Total Profit Calculation:
$$\text{Profit} = 50 \text{ pips} \times \$2.00 = \mathbf{\$100.00}$$
Summary Cheat Sheet
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Standard Pip Location: 4th decimal place ($0.0001$).
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JPY Pip Location: 2nd decimal place ($0.01$).
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EUR/USD Pip Value (1 Standard Lot): Fixed at $10.00.
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EUR/USD Pip Value (1 Micro Lot): Fixed at $0.10.
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Rule of Thumb: Always calculate your pip value before placing an order to ensure your trade size aligns with your risk tolerance.