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

If you’ve just started interested in Forex or CFD trading, you’ve probably heard the term “pips” many times. Pips are the basic unit of measurement used in the Forex market to indicate the amount of price change. But its importance isn’t just in the definition—because it’s directly linked to your profits, losses, and risk management.

Basic Understanding: Pips Are a Risk-Reward Measurement Unit

Simply put, a pip (Price Interest Point) is the smallest possible price movement in a currency pair. For most currency pairs, like EUR/USD or GBP/USD, one pip equals 0.0001, which is the fourth decimal place.

For example, if EUR/USD moves from 1.0614 to 1.0615, that’s exactly a 1 pip move. This change may seem small, but when trading large volumes, one pip can make a difference of hundreds of dollars in profit or loss.

Important exception: the Japanese Yen

The Japanese Yen (JPY) has different rules. For currency pairs involving JPY, such as USD/JPY or EUR/JPY, one pip equals 0.01, not 0.0001. So, a move from 126.68 to 126.69 in USD/JPY is a 1 pip move.

Real Examples: How Pips Affect Profit and Loss

Let’s see how pips translate into real money in your trading account.

Scenario 1: Standard Lot of EUR/USD

Suppose you trade 1 standard lot (100,000 units) of EUR/USD at 1.1000 and close at 1.1050. How much profit is that? Since 1 pip of a standard lot EUR/USD is worth $10, the move of 50 pips equals 50 × $10 = $500 profit.

If instead the price drops 50 pips (from 1.1000 to 1.0950), you would lose $500.

Scenario 2: Mini Lot of USD/JPY

You sell USD/JPY 1 mini lot (10,000 units) at 145.80 and close at 145.40. The 40 pip move (remember, JPY uses smaller pip units) results in approximately $40 profit.

Scenario 3: Using Stop-Loss with Pips

If you plan to risk a maximum of $100 per trade and trade with a mini lot where 1 pip = $1, you can set your stop-loss 100 pips away from entry. With a risk-reward ratio of 2:1, your profit target would be 200 pips.

How to Calculate Pips for All Currencies

Case 1: USD account, USD as the quote currency

If you have a USD account and trade currency pairs where USD is the quote currency (like EUR/USD, GBP/USD), the pip value is always fixed:

• Standard Lot: $10 per pip
• Mini Lot: $1 per pip
• Micro Lot: $0.10 per pip
• Nano Lot: $0.01 per pip

Case 2: USD account, USD as the base currency

When USD is the base currency, like USD/CAD, use this formula:

Pip Value = Base value ÷ Exchange Rate

Example: USD/CAD at 1.35104

• Standard lot pip value = $10 ÷ 1.35104 ≈ $7.40

Case 3: Non-USD accounts

If your account is in CAD and you trade EUR/CAD:

1. Pip value for standard lot = CAD$10
2. For EUR/CAD at 1.47421, divide CAD$10 by 1.47421: ≈ €6.78 per pip

Special case: currency pairs with JPY

For CAD/JPY at 78.872:

• Standard lot pip value = CAD$10
• Since JPY uses two decimal places, multiply the calculation by 100: (CAD$10 ÷ 78.872) × 100 ≈ CAD$12.68 per pip

Tools to Calculate Pips and Why Use Them

Instead of manual calculations, you can use pip calculators available on various platforms:

Online calculators:

• Myfxbook Pip Calculator
• BabyPips Pip Calculator
• Broker tools like Exness and IC Markets

Trading platforms: MetaTrader 4 (MT4) and MT5 have built-in pip indicators that automatically calculate pip value in real-time, saving you from manual math.

Quick formulas for emergencies:

• Most currency pairs: Pip Value = 0.0001 × Lot Size
• Pairs with JPY: Pip Value = 0.01 × Lot Size ÷ Exchange Rate

Benefits of Using Pips in Risk Management and Strategy

1. Clear Stop-Loss and Take-Profit Settings

Instead of vague ideas like “exit when the market looks bad,” professional traders say, “exit when I lose 30 pips.” This discipline helps prevent emotional trading.

2. Fair Comparison of Trading Results

Winning 50 pips on EUR/USD and 50 pips on GBP/JPY may have different dollar values, but both represent similar market movements in relative terms. This helps analyze strategy performance regardless of lot size.

3. Tracking Risk-Reward Ratios

Set clear goals like “average profit of 30 pips per trade” or “win 60 pips weekly.” Consistently tracking pips helps you see how your strategy performs over time.

4. Eliminating Confusion Across Different Currencies

Pips are a standard language that makes everyone speak the same way about market movements, whether trading Euro or Yen.

Summary: Pips Are the Foundation of Disciplined Forex Trading

Pips aren’t just numbers—they’re tools that connect your intentions with tangible results. Whether you’re a beginner or experienced trader, understanding pips is key to:

• Setting appropriate stop-loss and take-profit levels
• Calculating correct lot sizes based on risk
• Comparing performance across currency pairs
• Developing discipline to prevent emotional trading

By understanding and using pips correctly, you can trade more clearly, confidently, and with better-planned strategies.