Forex Pip Explained: A Beginner’s Guide to What It Is and Why It Matters

If you’ve started learning about forex trading, you’ve probably come across the term “pip.” It’s one of the most basic and essential terms in the world of foreign exchange — yet many beginners find it confusing at first.

In this article, you’ll learn everything you need to know about the forex pip: what it is, how it works, how to calculate it, and why it’s important in your trading journey. And don’t worry — we’ll keep the language simple and the examples easy to follow.

What Is a Forex Pip?

The word “pip” stands for “percentage in point” or “price interest point.” In simple terms, a pip is a unit that measures the change in value between two currencies in a forex pair.

It is the smallest price movement a currency pair can make under regular conditions.

For most pairs (like EUR/USD):

• 1 pip = 0.0001 (the fourth decimal place)
  

For JPY pairs (like USD/JPY):

• 1 pip = 0.01 (the second decimal place)

🔍 Example 1:

If EUR/USD moves from 1.1000 to 1.1005, the price has moved 5 pips.

🔍 Example 2:

If USD/JPY moves from 135.00 to 135.20, the move is 20 pips.

Why Are Pips Important in Forex?

Pips are used to:

• Measure market movement
  
• Track profits and losses
  
• Set stop-loss and take-profit levels
  
• Compare spread costs between brokers
  

Every trader uses pips as a basic unit to describe and manage trades. It’s the universal “language” of forex trading.

How Much Is One Pip Worth?

The value of a pip depends on:

• The currency pair
  
• The lot size (how much you’re trading)
  
• The current exchange rate
  

Let’s break it down using common lot sizes:

Lot Size	Units Traded	Value of 1 Pip (Most Pairs)
Standard Lot	100,000	$10
Mini Lot	10,000	$1
Micro Lot	1,000	$0.10

Example:

If you trade 1 standard lot (100,000 units) of EUR/USD, and the price moves 15 pips in your favor:

• Profit = 15 × $10 = $150
  

If it moves against you, it’s a $150 loss.

How to Calculate Pip Value

You can use this formula to calculate pip value manually:

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Pip Value = (1 pip / Exchange Rate) × Lot Size

Example:

You’re trading 1 standard lot of EUR/USD, and the current rate is 1.1000.

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Pip Value = (0.0001 / 1.1000) × 100,000 = $9.09

So, each pip is worth about $9.09 in this case.

What Are Pipettes?

Some brokers quote prices with 5 decimal places (instead of 4). The fifth digit is called a pipette, or fractional pip.

Example:

EUR/USD = 1.10543
Here, the last digit (3) is the pipette.

• 10 pipettes = 1 pip
  

While pipettes allow for more precise pricing, most traders focus mainly on full pips.

Forex Pip and Spread

In forex trading, you’ll often hear about “spreads.” This is the difference between the bid price and the ask price, and it’s measured in pips.

Example:

EUR/USD:

• Bid: 1.1000
  
• Ask: 1.1002
  
• Spread = 2 pips
  

This is effectively your cost to enter the trade. The tighter the spread, the better.

How to Use Pips in Trading

Pips are more than just numbers — they’re used to build strategies and manage risk.

1. Stop-Loss & Take-Profit

You can set your stop-loss at 20 pips and your take-profit at 40 pips. This helps manage risk and lock in gains.

2. Risk Management

If you know how many pips you are risking per trade, you can easily calculate the dollar amount based on your lot size.

3. Backtesting and Strategy Building

Many strategies are built on historical pip movements — for example, “Look for a 50-pip breakout.”

Tools to Help You With Pip Calculations

Most trading platforms and forex brokers offer pip calculators for free. You just enter:

• Currency pair
  
• Lot size
  
• Account currency
  

And it instantly shows the value of one pip. Great tools include:

• BabyPips Pip Calculator
  
• Myfxbook
  
• MetaTrader platforms

Final Thoughts: Why Every Trader Should Know About the Forex Pip

The forex pip is one of the first things every new trader should understand. Even though it’s just a small unit of measurement, it plays a huge role in:

• Tracking price changes
  
• Measuring gains and losses
  
• Managing risk effectively
  

By learning what a pip is and how much it’s worth, you’re setting yourself up for smarter and safer trading.

Whether you’re trading EUR/USD, USD/JPY, or any other pair — understanding pips is the foundation of your forex trading journey.