You step into forex trading the moment you compare two currencies, and pips are the unit that tells you how much value shifted. A pip is the smallest standard price change in a currency pair (usually 0.0001 for most pairs and 0.01 for yen pairs), and it’s the basic measure used to calculate profits, losses, and trading costs.

Knowing what a pip is and how its monetary value changes with lot size and the quoted currency lets you size positions and manage risk with precision. This article shows how pips work, why yen pairs differ, and how to convert pip movements into actual profit or loss so you can trade with clearer expectations.

Key Takeaways

• Pips measure the smallest standardized price move in a currency pair.
• Pip value depends on the pair, lot size, and which currency is quoted.
• Understanding pips lets one calculate trade gains, losses, and spread costs.

Understanding Pips in Forex Trading

A pip defines the smallest standard price change in a currency quote and serves as the unit traders use to measure gains, losses, spreads, and risk. Its value depends on the currency pair, lot size, and which currency is the account or quote currency.

Definition and Origin of a Pip

A pip originally meant “percentage in point” or “price interest point” and became the market shorthand for the smallest whole-unit change in an exchange rate.

For most major currency pairs, a single pip equals 0.0001 of the quoted price—one ten‑thousandth—which aligns with price quotes given to four decimal places.

Traders use pips to express profit and loss without converting to account currency immediately.
The pip standard grew from market convention to provide a consistent unit for quoting spreads, setting stop-loss and take-profit levels, and communicating trade size.

Decimal Placement and Standard Pip Sizes

Most currency pairs use four decimal places, so the pip sits in the fourth decimal digit (0.0001).
Example: EUR/USD moves from 1.1356 to 1.1366 equals a 10‑pip move.

JPY pairs are the common exception; they use two decimal places, making one pip equal to 0.01.
Example: USD/JPY from 110.25 to 110.35 equals a 10‑pip move.

Pip value depends on lot size (micro, mini, standard) and which currency is the quote or account currency.
Practical formula when the account is in the quote currency: Pip value = Lot size × Pip size (e.g., 10,000 × 0.0001 = 1 unit of quote currency).

Pipettes and Fractional Pips

A pipette (fractional pip) equals one‑tenth of a pip and appears as a fifth decimal digit for most pairs (or third for JPY pairs).

Brokers quote pipettes to show tighter spreads and improve price precision; a 1.23456 quote shows 6 at the pipette level.

Traders can use pipettes to measure very small price moves for high‑frequency or scalping strategies.
When calculating profit or spread costs, convert pipettes into pips (10 pipettes = 1 pip) before applying lot‑size formulas to avoid errors.

Difference Between Pips, Points, and Pipettes

“Pip” denotes the standard smallest whole-unit movement (0.0001 or 0.01 for JPY pairs).
“Point” can mean a pip in forex, but in other markets (stocks, indices) a point often equals one unit of price movement and may not match a pip’s fractional scale.

“Pipette” specifically means one‑tenth of a pip (0.00001 or 0.001 for yen pairs).
Use this quick reference:

• Pip = 0.0001 (most pairs) or 0.01 (JPY pairs)
• Pipette = 0.00001 (most pairs) or 0.001 (JPY pairs)
• Point = context-dependent; verify market convention before using it in calculations.

Calculating and Using Pips in Forex Trading

Pips quantify the smallest standard price change for a currency pair and translate directly into position value, risk, and profit or loss. Traders must convert pip moves into their account currency using the pair’s quote, the position’s lot size, and current exchange rates.

How to Calculate Pip Value

To calculate a pip value, identify the pip size for the pair (usually 0.0001 for most majors, 0.01 for JPY pairs). Then use this formula:

• Pip value (in quote currency) = pip size × position units.

For example, for EUR/USD with pip size 0.0001 and a 100,000-unit (standard lot) position:

• 0.0001 × 100,000 = 10 USD per pip (quote currency = USD).

If the account currency differs from the quote currency, convert using the current exchange rate (e.g., multiply/divide by an appropriate pair like USD/JPY or EUR/USD). Trading platforms and a forex pip calculator automate these steps and show pip value in account currency.

Pip Values by Lot Size and Currency Pair

Lot size directly scales pip value. Common lot sizes:

• Standard lot = 100,000 units
• Mini lot = 10,000 units
• Micro lot = 1,000 units

Using EUR/USD (pip = 0.0001):

• Standard: 0.0001 × 100,000 = 10 USD/pip
• Mini: 1 USD/pip
• Micro: 0.10 USD/pip

For JPY pairs, use pip size 0.01. Example GBP/JPY at 0.01 pip size and a mini lot (10,000 units):

• 0.01 × 10,000 = 100 JPY/pip, then convert to account currency. Exotic pairs and less-liquid markets may have wider spreads and atypical pip conventions; always confirm pip size on the trading platform.

Role of Pips in Profit and Loss Calculation

Profit or loss equals pip movement × pip value × number of lots. For instance, a 25-pip move on a mini EUR/USD (1 USD/pip) with one lot equals 25 USD profit/loss. Position size controls exposure: doubling lots doubles pip-value impact.

Risk management uses stop-loss in pips and position sizing to cap potential loss in account currency. Traders commonly use a pip calculator to translate desired risk (in dollars) and stop-loss (in pips) into the correct lot size. Accurate pip calculation ensures consistent profit and loss reporting across currency pairs and account denominations.