Trading forex can be exciting and
profitable, but if you're like many beginners, there’s one term that probably
has you scratching your head: Pips. You’ve probably seen it pop up when
you look at your trading charts, and maybe you’ve even heard other traders talk
about pips like they’re some kind of magic formula. But don’t worry—you’re not
alone in feeling confused. I remember when I first started, I was in the exact
same boat!
Let’s take a closer look at what
pips are, why they matter, and how understanding them can make you a more
confident trader. By the end of this article, I hope you’ll see that while pips
might sound complicated, they’re actually pretty simple once you break them
down.
What Exactly Is a Pip?
If you’re new to forex trading, the
term pip might sound like something from a math textbook or a foreign
language. But I promise it’s not as tricky as it seems. So, what is a pip?
In forex trading, a pip
stands for "percentage in point" or "price interest point."
It’s a unit of measurement used to show how much a currency pair has moved. In
simpler terms, a pip is just a way to measure how much the value of a currency
has changed.
Now, let’s get into the numbers:
- For most currency pairs, a pip is the fourth
decimal place after the point (1.0000). For example, if EUR/USD moves
from 1.1000 to 1.1005, that’s a 5-pip movement.
- For Japanese yen pairs, like USD/JPY, a pip
is the second decimal place after the point (150.00). For example,
if USD/JPY moves from 150.00 to 150.05, that’s also a 5-pip movement.
In short:
- EUR/USD: 1.1000 → 1.1005 = 5 pips
- USD/JPY: 150.00 → 150.05 = 5 pips
Pip Example: Let’s say
EUR/USD is trading at 1.3055.
If it moves to 1.3065, that’s a 1-pip move.
If it moves to 1.3105, that’s a 50-pip move.
And if it moves to 1.3505, that’s a 500-pip move!
Why Should I Care About Pips?
Now that we know what a pip is, you
might be wondering: Why does this even matter to me as a trader? Well,
pips are essential because they help you understand how much money you could
make or lose from a trade.
In forex, prices move constantly.
So, every time the price moves, whether up or down, it’s measured in pips. And
each pip movement affects your profit or loss. The larger the pip movement, the
bigger the potential profit (or loss).
Here’s how pips matter:
- Profit and Loss: A movement of 100 pips in a
pair like EUR/USD could mean a substantial profit or loss, depending on
your position size (more on that later). Understanding pips helps you
calculate exactly how much you could make (or lose) on a trade.
- Risk Management: Knowing how many pips
you’re risking with each trade helps you determine the right stop-loss and
take-profit levels. For example, if you’re trading a pair that typically
moves 50 pips a day, you might want to place your stop-loss 50 pips away
to give the trade room to breathe.
- Setting Goals: Pips help you set realistic
profit goals. Instead of focusing on dollar amounts or trying to hit home
runs with every trade, you can focus on reaching a certain number of pips
per day or week.
Pips, Points & Pipettes - What’s the Difference?
Okay, so now we know what pips are,
but there are a couple of other terms that are often used in trading that are
closely related: points and pipettes. Let’s clear up the
confusion here.
- Pip: As we already discussed, the pip is the
smallest unit of price movement for most currency pairs. It’s the fourth
decimal place (1.0000 → 1.0001 = 1 pip) or the second decimal place for
JPY pairs.
- Point: Sometimes, the term "point"
is used in place of pip. In forex, though, the word point can refer
to the same thing as a pip, but in other markets (like stock trading), it
could mean a larger movement. Be sure to check what’s meant by
"point" in the context of the market you’re trading in.
- Pipette: A pipette is a smaller fraction of
a pip, equal to one-tenth of a pip. For example, if EUR/USD moves from
1.10001 to 1.10002, that’s a 1 pipette movement. In everyday trading, you
don’t need to worry much about pipettes, but it’s useful to know they exist,
especially if you’re using a platform that shows them.
So here’s a quick guide to help you
remember:
- 1 pip = 1 price movement in the fourth decimal
place for most currency pairs
- 1 pipette = 0.1 of a pip (one-tenth)
Calculating the Value of a Pip
Now that you understand what pips
are and why they matter, let’s talk about how to calculate the value of
a pip. This is where some beginners get stuck, but once you break it down, it’s
not too hard.
The value of a pip depends on the
currency pair you’re trading and the size of the trade (also known as the lot
size). You see, each pip doesn’t have a fixed dollar value. Its value will
change based on two factors:
- The currency pair being traded.
- The size of your trade.
Let’s say you’re trading EUR/USD,
and you’re using a standard lot size (which is 100,000 units of the base
currency). If EUR/USD moves by 1 pip, you would make or lose $10.
Here’s a simple example to
calculate the pip value:
- EUR/USD = 1.1000
- 1 pip = 0.0001 (the fourth decimal place)
- If you’re trading a standard lot (100,000 units),
then:
Pip Value = (0.0001 / 1.1000) × 100,000 = $10
So, each pip move in EUR/USD is
worth $10 when you’re trading a standard lot.
Other Lot Sizes:
- Micro lot (1,000 units): $0.10 per pip
- Mini lot (10,000 units): $1 per pip
- Standard lot (100,000 units): $10 per pip
If you’re using leverage, your pip
value can change, but that’s something to keep in mind as you get more advanced
in your trading.
Practical Use of Pips in Forex Trading
So, how do pips really come into
play when you're actually trading? They help you make decisions about things
like:
- Stop-Losses: Setting a stop-loss means
deciding at what point you’ll exit the trade if things go against you. If
you’re risking 50 pips, you’ll know your potential loss upfront.
- Take-Profits: Similarly, setting a
take-profit means you’re planning on exiting the trade when the price
moves a certain number of pips in your favor.
For example:
- If you enter a trade with a 50-pip stop-loss and a
100-pip take-profit, your potential risk-to-reward ratio is 1:2. This
means you’re risking 50 pips to try and make 100 pips.
- If you’re trading with a 1% risk, and your trade
moves against you by 50 pips, you’ll lose 1% of your account balance. But
if it moves in your favor by 100 pips, you’ll make a 2% profit.
Don’t Overthink It
As you can see, pips are a crucial
part of forex trading, but there’s no need to overcomplicate things. Once you
get comfortable with them, you’ll start to see how pips fit into your overall
trading strategy. The best thing you can do is practice, experiment, and learn
how to use pips in a way that fits your style.
A lot of beginners get bogged down
by the math or try to remember too many formulas. But trust me, once you get
the basics, the numbers will start to make sense. Most trading platforms, like
TradingView or MetaTrader, will calculate pip values and profits for you
automatically, so you don’t need to memorize everything.
Conclusion - Keep It Simple, Focus on the Big Picture
Understanding pips is a key part of
becoming a successful forex trader, but remember, it’s just one piece of the
puzzle. Once you get comfortable with the basics, you’ll see how pips can help
you make smarter trades, manage risk, and set reasonable goals.
So, don’t stress if pips seem a
little tricky at first. It’s all part of the learning process, and with time,
you’ll find that they’re not so hard to understand after all. Keep practicing ...and keep learning. Every successful
trader started where you are right now—feeling a little confused, maybe a
little overwhelmed, but with the drive to understand and improve. And remember,
trading isn’t about getting everything perfect from the start. It’s about
learning as you go, adjusting your strategies, and improving your skills over
time.
Keep Practicing & Experimenting
The more you practice, the better
you’ll understand how pips fit into your overall trading strategy. Set up a
demo account or continue paper trading so that you can experiment without any
risk to your real capital. Try different strategies, test out how pips affect
your profits and losses, and adjust your approach as you gain more confidence.
When you're just starting, it’s
important to get comfortable with the basics first. Focus on mastering how pips
work before diving into more complex topics like leverage, margin, or advanced
chart patterns. Build your foundation, and the more advanced concepts will come
naturally.
Understanding Risk Management
with Pips
One of the biggest challenges in
trading is managing your risk. But by understanding how pips work, you’ll be
able to set stop-losses and take-profits that make sense for you. A
well-planned trade starts with calculating how many pips you're willing to risk
on each trade.
For example:
- If you’re willing to risk 2% of your account
balance on a single trade and you know your pip value, you can calculate
the position size that aligns with your risk tolerance.
- If EUR/USD is trading at 1.2000 and you set a
stop-loss 30 pips away (to 1.1970), you know that you’re risking 30 pips.
If each pip is worth $10, your total risk for that trade would be $300 (30
pips x $10).
This type of planning helps you
avoid big losses and ensures you're trading within your risk limits. Risk
management is vital to long-term success in forex, and pips play a central role
in how you calculate and manage that risk.
Setting Realistic Goals with
Pips
Another important thing to keep in
mind is that success in trading isn’t about making huge profits every day. It’s
about consistency. Once you get comfortable with pips, you can set realistic
goals for your trading.
For instance:
- Aim to capture 20-50 pips a day. It may not sound
like much, but when you do it consistently, it adds up.
- By focusing on small, achievable goals (like
capturing 20 pips per day), you reduce the pressure to “hit home runs” and
create a more sustainable approach to trading.
Consistency is the key to long-term
success, and understanding pips helps you focus on small, manageable gains that
add up over time.
Don’t Let Pips Stress You Out
The truth is, as you become more
familiar with the world of forex, you’ll realize that pips are just one part of
the puzzle. Sure, they’re important, but they’re not the only thing that
matters. It’s easy to get caught up in the numbers and forget that trading is
about much more than just how many pips you can grab from the market.
The big picture is about:
- Developing a solid strategy: Whether it’s
based on support and resistance, trend-following, or another method,
having a clear plan is essential.
- Staying disciplined: Don’t chase after the
next trade. Stick to your plan, and take profits when they’re there.
- Continuous learning: Keep improving your
knowledge. Read books, watch videos, take courses, and learn from your
mistakes. The more you learn, the better you’ll get.
My Final Thoughts
At the end of the day, trading is a
journey, not a destination. It takes time, effort, and plenty of practice to
become proficient. But if you take things one step at a time and focus on
understanding the fundamentals—like pips—you’ll be on the right path to
becoming a successful trader.
So, keep practicing, keep refining
your strategy, and don’t stress if things don’t go perfectly right away. Every
trader has their own pace, and the more you learn about pips, the more you’ll
realize how much they help in simplifying your approach to trading. Stay
patient, stay focused, and before you know it, you’ll be using pips like a pro!