By Alex Robinson 
If you’re new to the world of forex trading, you’ve probably come across the term “pip” dozens of times. It’s one of the most fundamental concepts in the foreign exchange market, but surprisingly, many beginners overlook it — and that’s a mistake.
In this in-depth yet beginner-friendly guide, I’ll explain what a pip is, how it works in forex trading, how much it’s worth, and why I personally believe understanding pips is one of the most important things a trader can do to avoid costly mistakes.
Let’s dive in.
What Does “Pip” Mean in Forex?
A pip in forex stands for “percentage in point” or “price interest point.” It refers to the smallest price move that a currency pair can make based on market convention.
For most major currency pairs, a pip is 0.0001, which is the fourth decimal place in a price quote.
Examples:
- If the EUR/USD moves from 1.1000 to 1.1001, that is a 1 pip increase.
- If the GBP/USD moves from 1.2800 to 1.2795, that is a 5 pip decrease.
However, when it comes to currency pairs involving the Japanese yen (JPY), things are slightly different. These pairs are quoted with only two decimal places, so in this case:
- 1 pip = 0.01
Example:
- USD/JPY moving from 150.20 to 150.21 = 1 pip
Why Do Pips Matter in Forex Trading?
Pips are not just a technical detail — they are the universal measurement unit of price movement in the forex market. Whether you’re analyzing the market, calculating your risk, or closing a trade, you’ll use pips to track your gains and losses.
Here’s why I consider pips essential:
- They give you a standardized way to measure price movement across different currency pairs.
- They help you determine profit, loss, and risk per trade.
- They’re key in setting your stop-loss and take-profit levels.
- They affect your ability to manage leverage responsibly.
Without understanding pips, it’s impossible to know how much you’re really making or losing on a trade — and that’s a dangerous position to be in.
How Much is a Pip Worth?
The actual value of a pip depends on three things:
- The currency pair you’re trading
- The lot size of your trade
- Your account’s base currency
Let’s start with the basics.
Standard Pip Values (Assuming USD is the Quote Currency)
| Lot Size | Pip Value (in USD) |
| Micro Lot (1,000 units) | $0.10 |
| Mini Lot (10,000 units) | $1.00 |
| Standard Lot (100,000 units) | $10.00 |
Example:
You’re trading 1 standard lot of EUR/USD.
- Price moves from 1.1000 to 1.1010 = 10 pips
- 10 pips × $10 = $100 profit (or loss if in the opposite direction)
Pro Tip: If your account is in another currency (like EUR or GBP), or you’re trading a cross pair (like EUR/JPY), your broker will automatically convert the pip value based on real-time exchange rates.
Pipettes: The Smaller Sibling of the Pip
Some brokers use 5-digit pricing for more precision. This introduces the concept of a pipette, which is 1/10th of a pip.
Example:
- EUR/USD at 1.10507 → 1 pipette = 0.00001
Pipettes allow for tighter spreads and more accurate pricing, especially during volatile market conditions. While pipettes are useful, most traders still refer to whole pips when discussing trade size, profit, or loss.
How Pips Relate to Risk Management
This is where pips really start to matter. Every trade you take should be based on a calculated risk-reward ratio, and pips are how you measure that.
Example Scenario:
- You enter a buy trade on GBP/USD at 1.2500.
- You place a stop-loss at 1.2470 = 30 pips risk.
- You target 1.2560 = 60 pips potential reward.
- If you’re trading 1 mini lot (10,000 units), then:
- Risk: 30 pips × $1 = $30
- Reward: 60 pips × $1 = $60
- Risk/Reward Ratio = 1:2
When you think in terms of pips, you can standardize your risk and avoid emotionally driven decisions. In my opinion, this is one of the key traits that separates consistent traders from gamblers.
Calculating Pips Manually vs Using Tools
If you’re a math lover, you can calculate pip values manually using formulas based on the specific currency pair and trade size.
But let’s be honest — most people prefer speed and convenience. That’s why most brokers offer built-in pip calculators, or you can use free ones online.
However, I strongly believe every new trader should try to manually calculate pip values at least a few times just to understand the logic behind it. It gives you confidence and improves your grasp of money management.
Common Pip Mistakes New Traders Make
Here are some of the most frequent mistakes I see among beginners when it comes to pips:
Ignoring the pip value when calculating position size
If you don’t understand pip values, you can accidentally take on way more risk than you intended.
Confusing pip with pipette
A small decimal difference can lead to huge misjudgments, especially with tight stop-losses.
Measuring trades in dollars, not pips
Thinking only in dollar terms is misleading. Always calculate both pip movement and its dollar impact.
My Honest Opinion: Learn Pips First, Trade Second
If you ask me, understanding pips should come before placing your first real-money trade. The forex market is fast and exciting, but jumping in without mastering basic units like pips is like driving a car without knowing how the brakes work.
I’ve worked with traders who made huge mistakes simply because they didn’t understand pip value — like risking hundreds of dollars on a micro account without realizing it. Don’t be that person.
Learning how to calculate and track pips is not only essential — it’s empowering.
Final Thoughts: The Pip Is Small But Mighty
To sum it all up:
- A pip is the smallest unit of movement in forex pricing.
- For most pairs, 1 pip = 0.0001; for yen pairs, it’s 0.01.
- The value of a pip depends on your lot size and currency pair.
- Understanding pip values helps you manage risk, measure trades, and avoid mistakes.
While it may seem like a tiny detail at first, the pip is at the heart of every trade you make. Whether you’re scalping a few pips or targeting hundreds, knowing what those pips mean in real money is the difference between guessing and trading with purpose.
FAQs: Everything You Still Might Wonder About Pips
Q: What is a pip in forex in simple words?
A: A pip is the smallest unit of price movement in a currency pair, usually 0.0001 or 0.01 for yen-based pairs.
Q: How do I calculate pip value?
A: Multiply the pip size by the lot size and convert it into your account currency if needed. Or use a pip calculator.
Q: Can you make money from just a few pips?
A: Yes — especially when using large lot sizes or high leverage. But high leverage increases your risk too.
Q: Are pip values fixed?
A: No. They vary depending on the pair and your account currency. Your platform will show you the exact value.
Q: Is it better to trade pairs with smaller or larger pip movements?
A: It depends on your strategy. Scalpers prefer frequent small pip moves; swing traders go for larger trends.