What are Pips? Why do Forex traders need to understand them

When entering the Forex trading industry, the term “pips” is a word you will hear frequently, whether from market analysis, traders’ opinions, or even when planning risk management. But what are pips? And how important are they for your trading?

What are Pips? - A Clear Definition

Pips (stands for Price Interest Point), which is the standard unit of measurement for price changes in currency pairs in the Forex market. It is also used in CFD trading.

For most currency pairs, pips are the 4th decimal place. For example, if EUR/USD moves from 1.0614 to 1.0615, that indicates a movement of 1 pip. This change of 0.0001 is considered a 1 pip movement.

However, there is a significant exception, especially with currency pairs involving the Japanese Yen (JPY). In this case, pips are the 2nd decimal place. For example, if USD/JPY moves from 126.68 to 126.69, the change of 0.01 is 1 pip.

Additionally, many brokers offer Fractional Pips (pips fractions), which show the 5th decimal place for common pairs, such as 1.06154. The ‘4’ in this case indicates 0.4 pip, allowing for more precise pricing.

How to Calculate Pips - Simple and Essential Steps

Calculating pip value is fundamental for risk management because the actual value of each pip varies depending on several factors.

For accounts denominated in USD

If USD is the second currency in the pair (such as EUR/USD, GBP/USD), the pip value remains constant:

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

For example, if you trade EUR/USD with 1 standard lot and the price increases by 50 pips, your profit will be 50 × $10 = $500

If USD is the first currency in the pair (such as USD/CAD), divide the pip value by the current exchange rate. For example, if USD/CAD is 1.35104, the pip value for a standard lot is 10 ÷ 1.35104 = $7.40

For accounts denominated in other currencies

If your account is in CAD and you trade USD/CAD, the pip value remains:

• Standard Lot: CAD$10 per pip
• Mini Lot: CAD$1 per pip
• Micro Lot: CAD$0.10 per pip

When CAD is the first currency in the pair (CAD/CHF), divide the fixed value by the exchange rate, e.g., at CAD/CHF = 0.75169, the pip value for a mini lot is 1 ÷ 0.75169 = CAD$1.33

For pairs involving JPY (such as CAD/JPY), multiply the result by 100 because pips for JPY are at the 2nd decimal place. For example, CAD/JPY at 78.872, the pip value for a standard lot = (10 ÷ 78.872) × 100 = CAD$12.68

Why Pips Are Important in Forex Trading

1. Effective Risk Management

When you set Stop-Loss and Take Profit in units of pips, you know how much you might lose or gain on each trade. This helps maintain discipline and consistency across all currency pairs. Instead of making emotional decisions, professional traders set “Stop-Loss at 30 pips” to keep decisions systematic.

2. Standardized Performance Measurement

A profit of 50 pips from EUR/USD and GBP/JPY may have very different cash values, but they represent equivalent market movements. Therefore, traders can compare performance across different currency pairs, lot sizes, and account currencies in an unbiased way.

3. Building Consistent Strategies

Tracking pips gained or lost helps identify patterns and improve strategies. Many traders set a goal of “an average of 30 pips per trade” to maintain consistent long-term performance.

Real Trading Examples Using Pips

Example 1: EUR/USD Standard Lot

You buy EUR/USD 1 standard lot at 1.1000 and close at 1.1050, making a profit of 50 pips × $10 = $500

If the price drops to 1.0950 (, you lose 50 pips), resulting in a loss of 50 × $10 = -$500

Example 2: USD/JPY Mini Lot

Sell 1 mini lot of USD/JPY at 145.80 and close at 145.40, earning 40 pips. Each pip is worth approximately $0.90 for a mini lot = about $1 profit

$40 Example 3: Risk Management

If your maximum risk per trade is ###and you trade a mini lot where 1 pip = $100 , you can risk 100 pips $1 with a 100-pip Stop-Loss from entry point(. With a risk:reward ratio of 1:2, the profit target will be 200 pips

) Example 4: Measuring Strategy Performance

A trader who makes an average profit of 30 pips per winning trade, with a 70% win rate, can consistently track results regardless of different lot sizes.

Pip Calculation Tools

Although manual calculation is straightforward, pip value calculators provide instant results by simply inputting the currency pair, lot size, and account currency.

Basic formulas:

• For most pairs: Pip Value = 0.0001 × number of units
• For JPY pairs: Pip Value = 0.01 × number of units ÷ price

Additionally, many trading platforms like MetaTrader support real-time pip data display and allow you to record losses and profits directly in pips per position.

Summary

Pips are a standard unit that helps traders measure market movements, profits, losses, and risks clearly. Whether trading Forex or CFDs, understanding and accurately calculating pip values will help you:

• Set appropriate Stop-Loss and Take Profit levels
• Manage risk with discipline
• Evaluate strategy performance objectively
• Make decisions based on systematic analysis rather than emotions

With this understanding, you will be better prepared to trade confidently and systematically.