Pip

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Pip (Forex): Definition, Value, and Examples

What is a pip?

A pip (percentage in point or price interest point) is the standard unit used to measure the change in value between two currencies in the foreign exchange (forex) market. For most currency pairs a pip equals 0.0001 (one ten‑thousandth). It is the smallest whole-unit movement quoted for those pairs and is the basis for quoting spreads and calculating gains or losses.

How pips are quoted

  • Most currency pairs: quoted to four decimal places; 1 pip = 0.0001.
  • Japanese yen (JPY) pairs: quoted to two decimal places; 1 pip = 0.01.
  • Fractional pips (pipettes): one pipette = 1/10 of a pip (fifth decimal place for most pairs).

Calculating pip value

A pip’s dollar value depends on three factors: the currency pair, the current exchange rate, and the trade size (lot size).

  1. When the quote currency (the second currency) is USD (e.g., EUR/USD)
  2. Pip size = 0.0001.
  3. Pip value = trade size × 0.0001.

  4. Example: 10,000 unit position in EUR/USD → pip value = 10,000 × 0.0001 = $1.
    If you buy at 1.0801 and sell at 1.0811 (10 pips), profit = 10 × $1 = $10.

  5. When USD is the base currency (the first currency) or for cross pairs

  6. Pip value = trade size × (pip size ÷ exchange rate).

  7. Example: USD/CAD at 1.2829 with a standard lot (100,000 USD):
    pip value = 100,000 × (0.0001 ÷ 1.2829) ≈ $7.79 per pip.
    A 1‑pip move yields ≈ $7.79.

  8. JPY pairs (two decimal places)

  9. Pip size = 0.01.
  10. Example: EUR/JPY at 132.62 with a 100,000‑unit lot:
    pip value ≈ 100,000 × (0.01 ÷ 132.62) ≈ $7.54 per pip (USD equivalent).

Pipettes (fractional pips)

Some brokers quote an extra decimal place (fifth for most pairs). That extra digit is a pipette = 0.1 pip. It provides finer price granularity for tighter spreads and more precise calculations.

Pips and profitability

Pips measure how much a currency pair’s exchange rate moves and therefore determine profit or loss when multiplied by the pip value and position size.

Examples:
* Buy EUR/USD at 1.1835, exit at 1.1901 → movement = 1.1901 − 1.1835 = 66 pips.
* Sell USD/JPY at 112.06, close at 112.01 → movement = 5 pips in your favor.
Large positions magnify pip-based gains and losses: on a $10 million USD/JPY position, a 5‑pip move can translate into a substantial local‑currency and USD result.

The spread and its cost

The spread is the difference between the ask and bid price and is typically quoted in pips.

Example:
* EUR/USD ask 1.1053, bid 1.1051 → spread = 0.0002 = 2 pips.
* Cost of spread for 100,000 units = 0.0002 × 100,000 = $20.

Real‑world limits: hyperinflation and redenomination

Extreme inflation or currency redenomination can make pip conventions meaningless. Historical examples:
* Weimar Germany (1920s): exchange rates rose to astronomical levels, breaking normal quoting conventions.
* Turkey (early 2000s): extreme devaluation led to removal of zeros and introduction of a new lira, simplifying quotes.

Key takeaways

  • A pip is the standard unit for measuring price movements in forex: typically 0.0001 for most pairs, 0.01 for JPY pairs.
  • Pip value depends on the pair, current exchange rate, and position size; use the formulas above to calculate it.
  • Pipettes provide one‑tenth of a pip for finer pricing.
  • Understanding pip values and spreads is essential for calculating trade costs, potential profit/loss, and managing risk.