What is a Pip in Forex Trading?

The Price Interest Point (the Pip) is a movement of currency prices or exchange rates in the Forex market. A pip is used to measure the change in exchange rate for a given currency pair. It is often determined by the last decimal point of the currency pair.

Most of the currency pairs in Forex are in 4 decimal places. The smallest change in the price of a currency pair is the change in the last decimal point of a currency pair. For instance, if the price of EUR/USD changes from 1.2652 to 1.2653, then the price of the currency pair will have changed by one pip or basis point.

The value of a pip in forex trading is calculated by multiplying one pip with a lot size of the base currency.

For example, if you are using a standard lot of 100,000 units, the pip value will be 100,000*0.0001 = $10.

Pip value = Lot size × One Pip

100,000 × 0.0001 = $10

For 10K lot size, the value of one pip for the EUR/USD will be:

10,000 × 0.0001 = $1

This means that in every change of 1 pip, you earn or lose $10. If the market favors you, you gain $10 for every pip; and if the market goes against you, you lose $10 for every pip.

Understanding the pip value of a currency pair is important because it enables a forex trader to determine their take profit and stop loss levels. A trader should understand how pip movements will affect their profits and the value of their trading account equity.

Each currency pair has a different pip value because each currency has a relative value.

There are other currency pairs that are not indicated in four decimal places, but rather in 2 or 5 decimal places. For instance, most major currencies against the Japanese Yen have two decimal places. Look at the prices of the currency pair below:

10K (mini) USD/JPY = 107.342

what is a pip in forex trading

The pip in this case is indicated as the second decimal place, which is 4. If the price changes to 107.33, then the price will have reduced by 1 pip.

The value of one pip movement for the Japanese Yen is JPY100 for the mini lots (10k) and JPY1000 for the standard lot size (100k).

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