What is a Pip in Forex? Simple Explanation

What is a Pip in Forex? Simple Explanation

What is Pip in Forex Trading? Simple Explanation

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Learn what is pip in forex trading in simple terms. Discover how pips work, why they matter, how to calculate them, and how traders use pips to measure profits, losses, and risks in Forex.

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Introduction

If you’ve ever started learning Forex trading, you’ve probably come across the word “pip.” It’s one of the most common terms in Forex, yet beginners often find it confusing. Understanding pips is essential because they form the foundation of how profits and losses are measured in the foreign exchange market.

In this article, we’ll give a simple explanation of what is pip in Forex trading, show you how to calculate it, explain its role in risk management, and provide practical examples so you can start trading confidently.

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What is Pip in Forex Trading?

The term pip stands for “percentage in point” or “price interest point.” It is the smallest standardized unit of change in the price of a currency pair.

For most currency pairs, 1 pip = 0.0001 (fourth decimal place).
Example: If EUR/USD moves from 1.1000 to 1.1001, that’s a 1 pip increase.

👉 According to Investopedia, pips help standardize forex trading and allow traders to communicate price changes clearly without confusion.

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Why Pips are Important in Forex

• Measure of Profit/Loss: Traders use pips to calculate gains and losses.
• Risk Management: Pips help set stop-loss and take-profit levels.
• Universal Language: Pips make it easier for traders worldwide to discuss price changes.

Without pips, comparing currency movements would be complicated.

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How to Calculate a Pip

Standard Pip Value

For most currency pairs quoted to four decimal places:

• 1 pip = 0.0001

For currency pairs with the Japanese Yen (JPY), the pip is at the second decimal place:

• 1 pip = 0.01

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Examples of Pip Movements

Currency Pair Price Change Pip Movement

EUR/USD	1.1000 → 1.1005	5 pips
GBP/USD	1.2500 → 1.2490	-10 pips
USD/JPY	145.20 → 145.30	10 pips
AUD/USD	0.6500 → 0.6515	15 pips

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Pip Value and Lot Sizes

The value of 1 pip depends on the lot size you are trading. In Forex:

• Standard Lot = 100,000 units
• Mini Lot = 10,000 units
• Micro Lot = 1,000 units

Table: Pip Value by Lot Size (for USD pairs)

Lot Size Value of 1 Pip Example Profit (10 pips)

Standard Lot (100,000)	$10 per pip	$100
Mini Lot (10,000)	$1 per pip	$10
Micro Lot (1,000)	$0.10 per pip	$1

Example:
If you trade 1 standard lot of EUR/USD and the price moves 10 pips in your favor, you gain $100.

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Pipettes: Smaller than a Pip

Some brokers also use pipettes, which are fractional pips.

• 1 pipette = 0.1 pip
• If EUR/USD moves from 1.10005 to 1.10006, that’s a 1 pipette move.

This allows for more precise pricing and tighter spreads.

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How Pips are Used in Risk Management

One of the most important uses of pips in Forex is risk management.

• Stop-Loss Orders: Traders limit losses by setting a stop-loss in pips.
• Take-Profit Orders: Target profit levels are also measured in pips.
• Risk-to-Reward Ratio: Typically calculated using pips (e.g., risking 20 pips to gain 60 pips = 1:3 ratio).

👉 Smart traders always measure risk in pips before placing trades.

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Pip vs Points vs Ticks

Many beginners confuse pips, points, and ticks.

Term Used in Meaning Example

Pip	Forex	0.0001 (most pairs)	EUR/USD: 1.1000 → 1.1001 = 1 pip
Point	Stocks/Indices	1 unit change in price	Dow Jones: 35,000 → 35,001 = 1 point
Tick	Futures/Commodities	Smallest price change allowed	Gold Futures: $1920 → $1920.10 = 1 tick

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Real-Life Trading Example

Imagine you buy 1 lot of GBP/USD at 1.2500 and sell at 1.2520.

• Movement = 20 pips.
• Value per pip (standard lot) = $10.
• Total Profit = 20 × $10 = $200.

If the trade went against you by 20 pips, you would lose $200.

This is why knowing what is pip in forex trading is essential for calculating profits and losses correctly.

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Common Mistakes Beginners Make with Pips

1. Ignoring Lot Size: Many think all pips have the same value. In reality, pip value changes with lot size.
2. Not Considering JPY Pairs: Forgetting that JPY pairs use two decimal places.
3. Overleveraging: Misunderstanding pip values often leads to oversized trades.
4. Confusing Pips with Points: Using stock terms incorrectly in Forex.

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Advanced: Pip Calculators

Traders can use online pip calculators to quickly find pip values based on:

• Currency pair
• Lot size
• Current exchange rate

👉 Brokers and financial websites often provide free pip calculators for accuracy.

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FAQs About Pips in Forex

Q1. What is pip in forex trading for beginners?
It’s the smallest unit of price movement in currency pairs, usually 0.0001.

Q2. Why are pips important in Forex?
They help calculate profits, losses, and manage risks in trades.

Q3. How do I calculate pip value?
Multiply pip size (0.0001) × lot size × exchange rate.

Q4. What’s the difference between pips and pipettes?
A pip is the standard unit, while a pipette is 1/10 of a pip for more precise pricing.

Q5. How many pips is good profit in Forex?
It depends on strategy, but many traders aim for 20–50 pips per trade with proper risk management.

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Conclusion

Now you understand what is pip in forex trading and why it’s a crucial concept for every trader. From calculating profits and losses to setting risk management strategies, pips are the building blocks of Forex.

Whether you’re a beginner learning the basics or an advanced trader refining strategies, mastering pip calculation ensures accuracy and consistency in your trades.

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Read next: [Top Forex Trading Strategies for Beginners]