What Is A Pip In Forex Trading?

Understanding pips in forex

What is a pip in forex trading? A pip in forex is a precise representation of price, showing the trader exactly how much a currency or currency pair is currently worth. Upwards pip movements show that the pair grew in value, while downward movements indicate the opposite.

Even smaller values are used to represent the value of a currency or a currency pair with even greater precision. These are known as pipettes or points, and they are a tenth of the size of a pip - ten of these smaller values equals one pip. The pip will be the smallest thing you’ll see on the dashboard and the last figure in the quoted value you see on the screen.

How to calculate pips

In most cases, a pip represents a movement at the fourth decimal place. This is true of many of the most frequently traded currencies in the forex market. For instance, if the Australian dollar moves up in value by 0.0001, this is a growth of 1 pip. This is also the case of the US dollar.

In other cases, however, it's different. A pip will be at the second decimal place for currencies available in very small dominations. So, a movement of 0.01 on the Japanese yen - typically much smaller in value than one Australian dollar - would equal one pip.

Outside the forex market, pips may be represented differently. A pip in a precious metal commodity like gold will be at the third decimal place (0.001), while crypto pips tend to be at the first decimal place (0.1).

Here's an example:
Let's say you want to make a 10,000 euros trade against a EUR/USD currency pair, which features a fixed pip of 0.0001 - 10,000 multiplied by 0.001 is 1, which means the pip value is $1. If you bought 10,000 euros against the US dollar at 1.810 and sold at 1.820, you would receive a profit of 10 pips or $10.

How to use pips in forex trading

Take a look at a few key use cases, and learn more about how to use pips in your forex trading strategy.

Spot trading
The most obvious use of pips in the forex market is spot trading. When you spot trade, you look at the real-time value of a currency pair or another asset. Pips are instrumental in measuring the rise or fall of the currency pair. As you analyse your trade and decide when to close the position, you'll need to keep track of the movement. Following the pips on your brokerage platform's dashboard will help you to do this.

Futures and forwards trading
Pips are crucial during forex futures and forward trading. While the exchange rate on a futures or forwards contract is locked in for the duration, the movement of the real-time spot price relative to this is critical to the contract's value. Measuring these movements in pips will tell you whether or not the futures or forwards trade was a success.

Leverage trading
Pips are crucial for traders working with leverage. Essentially, you are controlling a position far larger than your capital reserves would otherwise allow. With an unleveraged trade, fluctuations of one or two pips are not worth much, but leverage magnifies this - one or two pips, up or down, translate to major profits or losses depending on your forex strategy.

Protecting your positions
Stop loss and take profit tools help traders to protect their positions by closing them if the position strays outside pre-determined value parameters. These tools will also measure market movements in pips, and traders will use these increments to determine their next move.

Market analysis
You can use pips to analyse the forex market rather than directly making trades. This gives you an insight into what sort of market forces you are dealing with and what strategic moves will help you take advantage of these forces. Expanding your dashboard view to cover market movements over the last day, week, month or year will help you see market movements’ general direction.

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Frequently asked question

The amount of money made or lost per pip depends on the forex currency pair being traded.

In most cases, one pip is a movement at the second decimal place of the quote. So, if the quote currency is the Australian dollar, a movement of one pip will be worth less than the same movement on a British pound quote currency - simply because one unit of GBP is worth more than one unit of AUD.

No definitive answer tells you how many pips you should aim for per trade - your personal trading strategy will dictate this. For example, a scalper seeking to benefit from very small price movements across a short period may aim for movements of around one to five pips per trade. Longer-term trading strategies are executed over a much greater duration, so the pip target will be much greater too.

Day trading is a longer-term strategy, but it’s still a short-term approach - the position will always be opened and closed within the same day. As a result, day traders typically look for up to ten pips daily, often far fewer than this.

A pip in forex is far actually greater in size than a point. There are ten points in one pip, which is why pips are generally used for analysing prices rather than points - one point is simply too small to make much of a difference to the value of a currency pair.
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