If you’re someone new to trading, you probably have heard of terms like pips, pipettes, lots, and points plenty of times. If you’re feeling confused, this guide will explain what a pip in forex really means and how to measure it to turn any trade profitable, a pip at a time, or at least manage risks in trading.
Pip in Forex: Definition
Pip or percentage in point, symbolised as “P”, is a unit of measurement used in Forex. It stands for “price per unit” and quantifies movements of one currency unit against another. It’s also the smallest price movement that a currency pair can make. Thanks to pips, traders can measure the difference between two currencies.
The importance of knowing the meaning of a pip in forex couldn’t be overstated. A pip is how the bid-ask spread (discussed further in the next section) is measured in forex.
Pip units depend on the currency pair:
- With EURUSD, the 4th decimal place is the pip unit. So, for example, if EURUSD goes from 1.1840 to 1.1849, EUR is up 9 pips against USD.
- With USDJPY, the 2nd decimal is the pip unit.
Pips fluctuate a lot, so it is important for forex traders to understand them to make sound decisions. To better understand a pip, its related components: pipettes, lots and points are explained here.
- Pipettes/Points – A pipette or point is a fractional pip and equal to 1/10 of a pip. If a pip is in the fourth decimal place, and second decimal place (for JPY), a pipette or point is in the third (for JPY) or fifth decimal place of a forex pair.
- Lots – Forex is traded in number of currency units which is called lots. So, when a trader opens a position, they buy or sell in specific amounts. In forex, the tradeable number of currency units are set, in five types of lots: Standard (100,000 units or 1 Lot), Mini (10,000 units or 0.1 Lot), Micro (1,000 units or 0.01 Lot) and Nano (100 units or 0.001 Lot).
How to Calculate Pips with Lots
When trading, you can better decide when to buy and sell through pip calculation according to the lot(s) in hand. For example, you have bought 1 lot (Standard 100,000) of EURUSD at 1.1840 making your cost USD118,400. Later, the EURUSD increases in value to 1.1849 and you decide to sell for the higher price. Here, you would have made a profit of $90 at 9 pips.
Taking the Mini lot as an example, if you bought 0.1 Lot (Mini 10,000) of EURUSD at 1.1550 your cost would be USD15,500. Later, if EURUSD falls in value to 1.547 and you decide to sell to cut your losses, you would have made a loss of USD30 at 3 pips.
In the real world of trading, the basic calculation above won’t suffice. A pip calculator can be used instead to calculate trading profits and losses. With a pip calculator, the value of a pip of the currencies being traded is provided. This would be useful for margin traders for protecting their trade against the higher risk exposure from using leverages.
For traders using the MetaTrader 4 trading platform, the pipette is even more so important because now forex brokers make use of the fifth decimal point for normal pairs (non JPY) and third decimal point for JPY. To find out more about fitting your trading activity into a busy schedule, check out the ZFX MT4. Its features include seamless integration with other trading infrastructure and Expert Advisor (EA) compatibility among others. For those always on the go, the ZFX MT4 mobile version enables a full trading experience with streamlined features.
Since forex brokers now allow trading in pipettes, it’s important that forex brokers choose a trading platform that presents prices in pipettes as well. Traders view pipettes favourably in terms of being able to place Stop-Loss and Take-Profit orders more precisely.
Pip vs Spread in Forex: What’s the Difference?
Spread is another important term to understand in forex. It is the difference between the bid and offer prices for a currency pair. Meaning, it is a pivotal factor in determining if a trade will be profitable or otherwise. To calculate a spread of a currency pair, the difference between bid and ask prices needs to be calculated in pips. Additionally, value per pip also needs to be worked out to decide the tradability and potential profitability of a currency pair.
Using a pip calculator to see the changes in currency pair values won’t be enough for deciding on which pairs are worth trading. For day traders and long-term traders alike, spreads reflect the tradeability of a currency pair.
For example, the spread of EURUSD is generally under 3 pips. This means that, for a standard contract of 100,000 units, the spread cost for one contract is $30. A spread of 3 pips multiplied by $10 per pip equals $30. Pip per value for 1 lot is approximately $10 (more on this below).
Many factors come into play in determining value per pip such as the traded currency pair, position size and exchange rate of the currency pair. Therefore, the value per pip differs between currency pairs. Although there are pip value calculators available on the internet, it’s useful knowing them off the top of your head. Since the U.S. dollar is the most traded currency, starting with memorising the value per pip of pairs which have the USD as the quote currency would help. Below are the values per pip according to lot sizes:
- Standard Lot – $10
- Mini Lot – $1
- Micro Lot – $0.1
- Nano Lot – $0.01
EURUSD bid price: 1.1105
EURUSD ask price: 1.1110
Spread calculation: 1.1110 – 1.1105 = 0.0005. Therefore, the spread is 5 pips.
Next, the trader would find the currency pair’s spread in terms of average daily range (ADR). The range chosen is usually where the high and low prices have been consistent for a certain period. In this example, a 4-day range is chosen. The spread for each day is added then multiplied by 4.
By comparing the spread of the day to the ADR, a trader would be able to gain a clearer perspective on the pair’s liquidity and price movements in relation to market volatility. ADR research also allows for a trader to plot out their Stop-Losses and Take-Profits better due to what it reveals about the currency pair’s price movements over a certain period.
More on Pipettes in Currency Pair Quotations
A pip is the smallest possible price change the quoted currency in a forex pair can make. However, with the rise and growing adoption of online trading, brokers today offer trading with an extra decimal place. Called the pipette, this extra decimal place is even smaller than the pip but arguably more significant.
The pipette is the result of new advancements in finance technology. Today, communication networks have become so advanced, and incredible amounts of data can be processed simultaneously. Faster and more effective data transfers can now reproduce market quotes, refined to a fractional pip. Brokers can offer 1/10 of 1 pip, giving traders the added advantage of more precision in profit or losses calculations. In terms of how precise, scalping trading which require large positions and quick entry and exit points are the most affected when pipette trading. The smallest change in price availed by the pipette can have major impacts on a scalper’s trades and strategies.
However, when used to one’s advantage, narrower spreads are good news for traders because it means lower trading costs. Forex brokers can now compete and differentiate themselves through this extra decimal.
Applying Pipettes to Currency Pairs
A pipette is often described as a fractional pip or 1/10 of a pip but what does it mean? To begin in simple terms, 1 pip = 10 pips. Taking EURUSD as an example; if EURUSD was trading at 1.08000 and changes to 1.08003, it would have increased by 3 pipettes or 0.3 pips.
In another scenario where the EURUSD starts trading at 1.0800 and changes to 1.0801, it would have increased by 1 pip or 10 pipettes.
In forex trading, the higher the currency pair’s volatility, the higher the profit potential. Traders often evaluate forex pairs for tradeability before investing in them and volatility is one of the factors to look out for. In terms of volatility, it’s established by how many pips a currency pair’s value moves in a day. For instance, if a currency pair shows larger pip movements in a day it’s deemed to be of low liquidity, hence not the best for trading.
Due to the higher risk brought on by volatility, more risk management is required from the trader. Here’s where a pipette comes in handy. For any trader riding on volatile trends, precision is vital for any risk management strategy like setting a risk-reward ratio. To arrive at the most precise ratio possible, calculating a currency pair’s volatility based on pipette would better serve the purpose.
The Bottom Line
The pip may still be the more preferred lingo in trading. At the same time, the pipette is slowly being assimilated into today’s trading environments. Keeping this in mind, it’s foreseeable that future changes in trading will involve more than just the use of pipettes for quoting prices and trading in of itself.
Both the pip and pipette are a couple of the basics to know in trading. If for any reason a beginner trader might be unsure on what to start with for picking up trading, these two basics are a good place to start.
FAQs
- How much is 1 pip in forex?
The value per pip differs between currency pairs. Although there are pip value calculators available on the internet, it’s useful knowing them off the top of your head. Since the U.S. dollar is the most traded currency, starting with memorising the value per pip of pairs which have the USD as the quote currency would help. Below are the values per pip according to lot sizes:- Standard Lot – $10
- Mini Lot – $1
- Micro Lot – $0.1
- Nano Lot – $0.01
- How much is 50 pips in forex?
Pip units depend on the currency pair:- With EURUSD, the 4th decimal place is the pip unit. So, for example, if EURUSD goes from 1.1840 to 1.1849, EUR is up 9 pips against USD.
For example, when a day trader is deciding on if the EURUSD is a profitable currency pair to trade for the day, they would find out its spread-to-pip potential. Firstly, its spread needs to be calculated by finding the difference between bid and ask prices, as shown below:
EURUSD bid price: 1.1105
EURUSD ask price: 1.1110
Spread calculation: 1.1110 – 1.1105 = 0.0005. Therefore, the spread is 5 pips.
- With EURUSD, the 4th decimal place is the pip unit. So, for example, if EURUSD goes from 1.1840 to 1.1849, EUR is up 9 pips against USD.
- How many pips is 1 dollar?
Since the U.S. dollar is the most traded currency, starting with memorising the value per pip of pairs which have the USD as the quote currency would help. Below are the values per pip according to lot sizes:- Standard Lot – $10
- Mini Lot – $1
- Micro Lot – $0.1
- Nano Lot – $0.01
- How does forex pip work?
Taking EURUSD as an example; if EURUSD was trading at 1.08000 and changes to 1.08003, it would have increased by 3 pipettes or 0.3 pips.
