What Is a Pip?

A pip is a price measurement that’s usually used when trading currencies (forex trading) but you’ll occasionally hear people use the term in other markets too, although the term ‘points’ is more suitable in other markets. A pip is traditionally the smallest price movement that can happen with a currency pair. 

What Is a Pip

For the majority of pairs, one pip will be equal to the fourth decimal place. For example, let’s take EUR/USD and assume the price is currently 1.0745, if the price moves up to 1.0746 then that is a 1 pip move.

For some currency pairs this will be a bit different, particularly for pairs where a currency other than the US dollar is the quote currency (meaning the second currency in the pair, so we have the base currency and the quote currency). For example, pairs involving the Japanese yen. 

In those cases, when the yen is the quote currency, a pip is the second decimal place. If the price of USD/JPY moves from 133.88 to 133.89, that would also be a 1 pip move. 

You may find that some brokers these days will add another decimal place to the end, which is known as a fractional pip or sometimes a point. It’s good to know that, but it won’t make a huge difference, most of the time the pips are all you need for calculating most things with your trading.

How to Use Pips

A common way to use pips is for measuring how far the price has moved or could move. This can be important for many aspects of your trading.

For example, for your risk management you’ll need to know how much money you could potentially lose on a trade. To do that, you can figure out how many pips you’d allow the price to move against you (for example, how many pips from your entry price to your stop loss), and if you know how much a pip is worth to you (which you’ll know based on your position size) you’ll know the total amount of money you could potentially lose if the price reaches that point.

Likewise, a similar calculation is going to allow you to figure out your potential profit. If you know your position size then you’ll know how much one pip is worth to you, so if you calculate how many pips the price could move in your favour, you’ll be able to calculate the profit for the trade. You simply multiply the amount for one pip by the number of pips the price moves.

You can also easily use pips to measure your risk to reward ratio. This ratio shows you the difference between how much you have at risk compared to how much you could profit. By measuring the distance in pips, you can create a simple ratio.

For example, if your stop loss is 20 pips away and your profit target is 60 pips away, you know you’re risking 20 pips to earn 60 pips, which is a 1:3 risk:reward ratio. For every 1 you have at risk, you could potentially earn 3.

Measuring pips is usually pretty straightforward with most trading platforms, so don’t worry if maths isn’t your strong point. There will typically be a crosshair which you can drag across the move you’re wanting to measure and you can see how many pips that move was.

Understanding pips may seem a bit basic, but it’s important to understand, particularly for risk management.