What is a pip in forex trading? A simple explanation

Pip, defined

A pip, short for "percentage in point", is the smallest standard move in a currency pair. For most pairs it is the fourth decimal place: 0.0001. If EUR/USD moves from 1.1000 to 1.1001, it has moved one pip.

The exception: yen pairs

For pairs that include the Japanese yen, a pip is the second decimal place: 0.01. If USD/JPY moves from 150.00 to 150.01, that is one pip.

What a pip is worth

The value of a pip depends on your trade size. On a standard lot of 100,000 units of EUR/USD, one pip is worth about 10 US dollars. On a mini lot (10,000 units), it is about 1 dollar. On a micro lot (1,000 units), about 10 cents.

Why it matters

• Spreads are quoted in pips: a 1.2 pip spread is the cost to open a trade.
• Stop-loss and take-profit levels are usually set in pips.
• Risk is measured by multiplying your stop-loss distance in pips by the value per pip.

Example: you risk 20 pips on a mini lot. At roughly 1 dollar per pip, your maximum planned loss is about 20 dollars.

Once you can convert pips into money, you can size every trade to the amount you are willing to risk. Practise the maths on a demo account first.