What is a Pip in Forex Trading and How to Calculate Their Value

In forex, the most common term you will hear is the word “Pip”. Pips are the heartbeat of forex trading. They help traders measure price movements, profits, and losses in a standardized way.

By calculating the difference between the bid and ask prices, known as the spread, traders assess their profits or losses in terms of pips. Each pip movement in a trader’s favor indicates a gain, while each pip movement against them results in a loss.

This might sound too confusing at first, but if you can grasp the basics, you too can become an expert forex trader. So, let’s get started.

What is a Pip in Forex?

A pip, short for “percentage in point”, represents the smallest standardized unit of price movement in a currency pair. It measures how much a currency quote changes. In forex trading, every movement in price counts and the smallest measurable change in a currency pair’s price is known as a pip.

Whether you’re trading EUR/USD, GBP/JPY, or any other pair, understanding pips is essential to making sense of how money moves in the forex market.

Simply put, a pip represents the smallest whole unit price move that an exchange rate can make according to market convention. Learning how to calculate and interpret pips is a key step in becoming a confident and strategic trader.

Understanding the Importance of Pips in Forex

The forex market operates through currency pairs, where one currency is quoted against another. For instance, in EUR/USD, the euro is the base currency, and the U.S. dollar is the quote currency. Prices are usually displayed up to four decimal places (for example, 1.3050).

In most currency pairs, one pip equals 0.0001. So, if EUR/USD moves from 1.5001 to 1.5002, it means the pair moved one pip higher. When someone says, “I made 90 pips,” it means they profited from a 90-pip movement, not that they earned $90.

The actual cash value of a pip depends on the pip value, which varies depending on several factors.

Factors Influencing Pip Value

The value of a pip isn’t fixed—it changes depending on:

1. The Currency Pair Being Traded:

Different pairs have different pip values because the base and quote currencies vary in value and volatility.

2. The Trade Size (Lot Size):

A standard lot in forex equals 100,000 units of the base currency, micro represents 10,000 and mini equals to 1000. The larger your position size, the more each pip movement will be worth in your account’s currency.

3. The Exchange Rate:

Because pip values are often converted back into your account’s base currency (like USD), the current exchange rate also affects the pip’s worth.

These factors together determine how much profit or loss each pip movement represents in monetary terms.

How to Calculate Pips and Their Value?

Let’s make this practical. Suppose you open a $50,000 position trading the USD/CAD pair. You buy at 1.3000 and sell at 1.3050, thus gaining 50 pips.

Here’s how you calculate the pip value and total profit:

Step 1: Calculate pip value in the quote currency (CAD)

Each pip is 0.0001, so:

$50,000 × 0.0001 = $5 per pip (in CAD)

Step 2: Convert pip value into USD

Divide the pip value by the current exchange rate (1.3050):

$5 ÷ 1.3050 = $3.83 per pip (in USD)

Step 3: Calculate total profit

Multiply the pip value in USD by the number of pips gained:

50 pips × $3.83 = $191.50 profit

So, a 50-pip movement in your favor results in a $191.50 profit on a $50,000 trade. The same logic applies in reverse for a loss.

Why is Knowing the Pip Value Important?

• Better risk management– Traders can determine the risk per trade. Knowing pip values helps traders estimate potential profits and losses more accurately.

• More effective trade planning– Traders who understand pip values can set precise entry and exit points. A pip is one of the most important concepts in Forex that determines price changes.

Understanding pip value is essential for risk management and profit/loss calculation. Having a clear understanding of this concept helps traders improve their trading and control risk more effectively.

Pip Calculator

If you find all these maths difficult, don’t worry. Then, you can use the SureShotFX Pip Calculator app (Free) from Google Play Store. This free app will help you calculate pip for any trade. Additionally, it will help you calculate pip value according to your contract size.

So, mastering pip calculation gives traders the power to manage risk and plan their strategies more effectively. Whether you’re trading small positions or large ones, knowing how to calculate pip value helps you make smarter, more informed trading decisions.