A pip is a unit of measure used by traders to define the smallest change in value between two currencies.
- Forex traders use pips to define the smallest change in value between two currencies.
- Pip is short of point in percentage. Pips are the most fundamental unit of measure for forex traders.
- The value of a pip can be calculated into a monetary value for any currency pair and is often used to describe profit and loss.
What are pips?
The smallest unit of change between two currencies is referred to as a point in percentage (pip). A pip is the last decimal point in a currency price quote and is used to measure a change in price.
Most currency pairs are priced to four decimal places, although there are certain exceptions, such as Japanese Yen pairs which are priced to two. A pip is the fourth or second decimal place respectively. An example of this would be: GBP/USD 0.0001. GBP/JPY 0.01
Even though pips are a small unit of measure, many forex traders use leverage, which means even a small change in pip value can have a drastic effect on profit and loss.
How to calculate the value of a pip
Determining the value of a pip has its benefits while trading. To calculate the value of a pip three pieces of information are required: the currency pair being traded, the size of the trade, and the exchange rate of the currency pair. The value of a pip will be different for every currency pair due to fluctuating exchange rates.
A simple calculation is required to get a pip value: divide one pip (which is either (.0.0001) or (0.01), depending on the currency pair) by the current exchange rate of the forex pair you are trading, and then multiply it by the number of base units you are trading (known as the lot size).
For example, if GBP/USD is currently trading at 1.700 and you want to trade 10,000 units (a ‘mini lot), then the calculation would be:
(0.0001/1.700) x 10000
1 pip = £0.58
Where can I learn more?
For more information about pips and forex trading, checking out our courses page or definition pages is a great place to get started. You can also learn more about crypto trading, stocks and commodities.
Invezz is a place where people can find reliable, unbiased information about finance, trading, and investing – but we do not offer financial advice and users should always carry out their own research. The assets covered on this website, including stocks, cryptocurrencies, and commodities can be highly volatile and new investors often lose money. Success in the financial markets is not guaranteed, and users should never invest more than they can afford to lose. You should consider your own personal circumstances and take the time to explore all your options before making any investment. Read our risk disclaimer >