Understanding Pips in the Forex Market: A Key Tool for Risk Management

Forex trading requires an understanding of how to measure price movements. The basic tool used in the market is pips. Whether you are just starting or have extensive experience, knowing how pips work is key to risk management and effective trading planning.

What Are Pips: The Unit Measuring Market Movement

Pip (short for Price Interest Point) is a unit used to indicate how much the exchange rate between two currencies has changed. For most currency pairs, one pip equals a change in the fourth decimal place.

For example, if the EUR/USD pair moves from 1.0614 to 1.0615, that’s a 1 pip movement, which equals 0.0001.

However, many brokers now quote pips with five decimal places, called “fractional pips.” For example, 1.06154. In this case, the ‘4’ represents 0.4 pips (0.00004).

An important exception is the Japanese Yen pairs, which have only two decimal places, such as USD/JPY at 126.68. A move of 0.01 is equal to 1 pip. Brokers often show fractional pips in the third decimal place, like 127.936, where ‘6’ equals 0.2 pips.

Pip Calculation Formula for USD Accounts and Other Currencies

When USD is the quote currency (second position)

If you have a USD account and trade currency pairs where USD is the second currency (e.g., EUR/USD, GBP/USD), the pip value remains constant:

• Standard Lot (100,000 units): USD$10 per pip
• Mini Lot (10,000 units): USD$1 per pip
• Micro Lot (1,000 units): USD$0.10 per pip
• Nano Lot (100 units): USD$0.01 per pip

When USD is the first currency, such as USD/CAD, divide the above pip value by the exchange rate. For example, if USD/CAD is 1.35104, the pip value for a standard lot is USD$10 ÷ 1.35104 ≈ USD$7.40.

When trading with other currencies

If your account is in another currency, like CAD or EUR, and that currency is the quote currency (second position), the pip value remains fixed:

• CAD account for USD/CAD: CAD$10 per pip (standard lot)
• EUR account for GBP/EUR: EUR$10 per pip (standard lot)

When the account currency is the base currency (first position), divide the fixed pip value by the exchange rate. For example, for CAD/CHF at 0.75169, the mini lot pip value is CAD$1 ÷ 0.75169 ≈ CAD$1.33.

For Yen pairs, like CAD/JPY at 78.872, divide the fixed pip value by the rate and multiply by 100: (CAD$10 ÷ 78.872) × 100 ≈ CAD$12.68.

For currency pairs without the account currency

If you have a USD account but trade EUR/GBP, determine which currency (EUR or GBP) provides a fixed pip value (the second currency), then convert that pip value into your account currency.

For example, if GBP provides a fixed pip of GBP10 (standard lot), divide GBP10 by USD/GBP at 0.76554 to get USD$13.06.

Useful pip calculators are available on platforms like Exness, IC Markets, and websites like Myfxbook, BabyPips. MT4, MT5, and cTrader platforms also automatically display pip information during trading.

Applying Pips in Trading Strategies: Real Examples

Example 1: EUR/USD Standard Lot

Buy 1 standard lot of EUR/USD at 1.1000, and the price rises to 1.1050. You gain 50 pips. Since a standard lot of EUR/USD is worth $10 per pip, total profit is 50 pips × $10 = $500. If the price drops to 1.0950, the loss is also $500.

Example 2: USD/JPY Mini Lot

Sell USD/JPY 1 mini lot at 145.80 and close at 145.40 for a 40 pip profit. For Yen pairs, the mini lot pip value is around $0.90–$1, so profit is approximately $40.

Example 3: Managing Risk with Pips

If your maximum risk per trade is $100 and you trade a mini lot ($1 per pip), you can risk 100 pips. Set your stop-loss 100 pips away from entry. With a 2:1 reward-to-risk ratio, target 200 pips.

Example 4: Strategy Evaluation with Pips

Professional traders often evaluate performance in pips rather than dollar amounts. A trader averaging 30 pips per winning trade with a 70% win rate demonstrates strategy consistency, regardless of lot size.

Why Pips Are Critical to Performance

Clear and Consistent Risk Management

Pips measure risk and reward precisely. When setting stop-loss or take-profit levels, you’re using pips to quantify. This makes risk management neutral and consistent. Traders often say, “My stop-loss is 30 pips,” rather than emotional terms.

Standardized Comparison of Trades

Using pips allows comparison across different currency pairs. For example, 50 pips in EUR/USD and 50 pips in GBP/JPY may have different dollar values but represent the same market movement. This is essential for fair performance assessment.

Long-term Strategy Consistency

Tracking pips gained or lost helps refine strategies and identify patterns. Professional traders often set specific average pip goals, building credibility and reliability over time.

Simplifying Pip Calculations

For quick calculations, the basic formulas are:

• Most currency pairs: Pip value = 0.0001 × lot size
• JPY pairs: Pip value = 0.01 × lot size ÷ spot rate

Broker tools provide instant pip calculations. MT4 plugins also automatically calculate pip values in real-time, making trading more convenient.

Summary

Pips are at the heart of Forex trading and risk management. Whether trading currency pairs directly or via CFDs, understanding pip calculations tells you how each market move impacts your position.

Mastering pips enables precise stop-loss and take-profit placement, risk control, and performance evaluation before entering trades. For CFDs with long/short options and leverage, correct pip calculation is even more crucial.

A true understanding of pips leads to clearer decision-making, better risk management, and consistent trading performance.