In trading, a "pip" refers to the smallest possible price movement in the market. The term stands for "percentage in point" and represents the smallest increment that a currency pair can move in the foreign exchange (forex) market. Pips are a key unit of measurement in forex trading, used to quantify price changes and determine potential profit or loss.

 

What are ‘pips’ in forex trading?

In forex trading, a "pip" (short for "percentage in point") refers to the smallest unit of price movement in a currency pair. For most major currency pairs, which are typically quoted to four decimal places, a pip represents a 0.0001 change in price. For example, if the GBP/USD pair moves from 1.4000 to 1.4001, it has moved by one pip.

However, for currency pairs involving the Japanese yen (JPY), the price is quoted to two decimal places, so a pip in these pairs is equivalent to a 0.01 price movement. For instance, if the GBP/JPY pair moves from 150.00 to 150.05, it has moved by five pips.

In forex trading, you can trade using various financial instruments such as CFDs (contracts for difference) or spread betting. When you trade these instruments, you're speculating on whether a currency will strengthen or weaken relative to another. Every pip of price movement can result in a profit or loss, depending on the direction of the market relative to your trade position.
 

How to Use Pips in Forex Trading

In forex trading, pips (percentage in points) are a unit of measurement used to express the change in value between two currencies. Understanding how pips work is essential for managing trades, measuring price movements, and controlling risk.

1. Example 1: GBP/USD Trade
Suppose a trader enters a long position (buy) on the GBP/USD pair at 1.5000. If the exchange rate rises to 1.5040, the price has increased by 40 pips, which would result in a profit if the trader decides to close the position. Conversely, if the price falls to 1.4960, the price has dropped by 40 pips, leading to a potential loss.

2. Example 2: GBP/JPY Trade
Let’s say a trader takes a long position on GBP/JPY at 145.00. If the price rises to 145.75, it has moved 75 pips in the trader’s favor, potentially yielding a profit. However, if the price moves against the trader and drops to 144.25, the price has moved 75 pips against the trader, leading to a potential loss.
 

Managing Risk with Pips

Pips are not only useful for calculating profit and loss but also for managing risk. For example, a trader can use a stop-loss order to limit the amount they are willing to lose on a trade in terms of pips. By setting a stop-loss order, the trader can automatically exit a position if the price moves a certain number of pips against them, helping to prevent larger losses.
 

Calculating Leverage

Pips are also important when determining how much leverage to use. By calculating the potential price movement (in pips) and the corresponding risk, traders can better adjust their position size and leverage to align with their risk tolerance.

In summary, pips are an essential tool in forex trading, helping traders measure price changes, manage risk, and calculate potential profits or losses. Understanding how pips work can help you make more informed decisions when trading currency pairs.
 

Pip value calculator

How much profit or loss a pip of movement produces is dependent on the value of each pip. In order to learn how to work out pip value, we need to know the following three things: the currency pair being traded, the trade amount, and the spot price.

Pip value formula
The formula to calculate the value of a pip for a four-decimal currency pair is:

Pip value = (0.0001 x trade amount) / spot price

How to Calculate Pips in Forex Trading
Calculating pips is essential for determining the potential profit or loss in a forex trade. Here's how to calculate pips, using an example to illustrate the process.

Example : USD/CAD Trade
Imagine a trader opens a long position of $100,000 on USD/CAD when the exchange rate is 1.0548. Later, the price rises to 1.0568.

The value of USD/CAD rises to 1.0568. In this instance, one pip is a movement of 0.0001, so the trader has made a profit of 20 pips (1.0568 – 1.0548 = 0.0020 which is the equivalent of 20 pips).

The pip value in USD is (0.0001 x 100,000) / 1.0568 = $9.46

To calculate the total profit or loss from the trade, multiply the number of pips by the pip value: 20pips×9.46USD=189.20USD

Therefore, the trader made a profit of $189.20.
 

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. 

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.