Pip, Point, Tick & Pipettes — Understanding Forex Price Movements 🎯

PIP = Percentage In Point (or Price Interest Point)

Definition: The smallest, standardized unit of change in the exchange rate of a currency pair.

For the vast majority of currency pairs (EUR/USD, GBP/USD, AUD/USD, etc.), prices are quoted to four decimal places.

One Pip = 0.0001 (fourth decimal place)

Visual Example:

EUR/USD = 1.0850
          ↑↑↑↑
          ||||
          |||└─ 4th decimal = 0.0001 = 1 PIP
          ||└── 3rd decimal = 0.001 = 10 PIPS
          |└─── 2nd decimal = 0.01 = 100 PIPS
          └──── 1st decimal = 0.1 = 1000 PIPS

EUR/USD Movements:

1. Universal Standard:

• Trader in New York measures 50 pips
• Trader in Tokyo measures 50 pips
• Same movement, same measurement (regardless of account currency)

2. Fundamental to Trading:

• Spreads measured in pips (EUR/USD spread = 0.8 pips)
• Stop Loss set in pips (SL = 25 pips from entry)
• Take Profit set in pips (TP = 50 pips from entry)
• Risk-to-Reward calculated in pips (25-pip risk, 50-pip reward = 1:2 R:R)

3. Strategy Measurement:

• Average pip gain per trade
• Win rate in pips
• Maximum pip drawdown

Professional Rule: Never enter a trade without knowing: (1) How many pips to stop loss, (2) How many pips to target, (3) Pip value in dollars.

While the four-decimal convention applies to most pairs, JPY pairs are the major exception.

Why JPY is Different:

• Japanese Yen has significantly lower unit value
• 1 USD = ~150 JPY (vs. 1 USD = ~1 EUR)
• Quoting to 4 decimals would be 150.0000 (unnecessary precision)

JPY Pair Quote Format:

One Pip (JPY pairs) = 0.01 (second decimal place)

Visual Example:

USD/JPY = 150.25
          ↑↑↑↑↑
          |||||
          ||||└─ 2nd decimal = 0.01 = 1 PIP
          |||└── 1st decimal = 0.1 = 10 PIPS
          ||└─── Ones place = 1.0 = 100 PIPS
          |└──── Tens place = 10.0 = 1000 PIPS
          └───── Hundreds place

USD/JPY Movements:

Modern brokerage platforms offer fractional pip pricing for competitive advantage.

Pipette = One-tenth (1/10) of a pip

Also called: Fractional pip, Point, Micro pip

Purpose: Provides more precise pricing, tighter spreads

Standard Pairs (5-decimal pricing):

EUR/USD = 1.08507
          ↑↑↑↑↑
          |||||
          ||||└─ 5th decimal = 0.00001 = 1 PIPETTE
          |||└── 4th decimal = 0.0001 = 1 PIP (10 pipettes)

JPY Pairs (3-decimal pricing):

USD/JPY = 150.257
          ↑↑↑↑↑↑
          ||||||
          |||||└─ 3rd decimal = 0.001 = 1 PIPETTE
          ||||└── 2nd decimal = 0.01 = 1 PIP (10 pipettes)

1. Tighter Spreads (Competitive Advantage)

Example: EUR/USD Spread

Without Pipettes (4-decimal):

• Bid: 1.0850
• Ask: 1.0851
• Spread: 1.0 pip

With Pipettes (5-decimal):

• Bid: 1.08500
• Ask: 1.08508
• Spread: 0.8 pips (8 pipettes)

Benefit: Broker advertises "tighter spreads," attracting traders

For Most Traders: NO

Focus on Full Pips:

• Swing traders: Targeting 100-300 pips (pipettes irrelevant)
• Day traders: Targeting 20-50 pips (pipettes minor)
• Position traders: Targeting 500+ pips (pipettes meaningless)

When Pipettes Matter:

• ✅ Scalpers (5-15 pip targets)
• ✅ High-frequency traders
• ✅ Comparing broker spreads (0.8 pips vs. 1.2 pips)

Professional Approach: Acknowledge pipettes exist (for spread comparison), but calculate risk/reward in full pips only.

This is the most critical skill in this lesson. A pip is meaningless until you know its dollar value.

Pip Value = The monetary worth (in your account currency) of a 1-pip movement for a given lot size

Forex Lot Sizes:

*For pairs where USD is the Quote Currency (e.g., EUR/USD, GBP/USD)

Example: USD Account Trading EUR/USD

Formula:

Pip Value = Lot Size Units × Pip Size

Calculations:

Standard Lot (1.00) EUR/USD:

Pip Value = 100,000 × 0.0001 = $10.00 per pip

Mini Lot (0.10) EUR/USD:

Pip Value = 10,000 × 0.0001 = $1.00 per pip

Micro Lot (0.01) EUR/USD:

Pip Value = 1,000 × 0.0001 = $0.10 per pip

Quick Reference (USD Account, USD Quote Currency Pairs):

Example: USD Account Trading USD/JPY

Formula:

Pip Value = (Lot Size Units × Pip Size) ÷ Exchange Rate

Calculation: Standard Lot (1.00) USD/JPY at 150.00

Step 1: Calculate pip value in JPY
100,000 × 0.01 = 1,000 JPY per pip

Step 2: Convert JPY to USD
1,000 JPY ÷ 150.00 = $6.67 per pip

Note: Pip value changes slightly as exchange rate changes (dynamic, not fixed like USD pairs)

Understanding pip value allows you to calculate exact profit/loss for any trade.

Setup:

• Account Currency: USD
• Pair: EUR/USD
• Lot Size: 0.10 (Mini Lot)
• Pip Value: $1.00 per pip

Trade:

• Entry: 1.0850 (BUY)
• Exit: 1.0900 (SELL)

Calculation:

Step 1: Calculate pip movement
1.0900 - 1.0850 = 0.0050 = 50 pips

Step 2: Calculate profit
Profit = Pips × Pip Value
Profit = 50 pips × $1.00/pip = $50.00

Result: +$50.00 profit

Setup:

• Account Currency: USD
• Pair: GBP/USD
• Lot Size: 0.20 (2 Mini Lots)
• Pip Value: $2.00 per pip ($1.00 × 2)

Trade:

• Entry: 1.2650 (SELL)
• Exit: 1.2700 (BUY to close)

Calculation:

Step 1: Calculate pip movement
1.2700 - 1.2650 = 0.0050 = 50 pips (against you)

Step 2: Calculate loss
Loss = Pips × Pip Value
Loss = 50 pips × $2.00/pip = -$100.00

Result: -$100.00 loss

Professional Use Case: Position Sizing Based on Pip Value

Goal: Risk only 1% of $5,000 account on one trade

Setup:

• Account: $5,000
• Risk: 1% = $50 maximum loss
• Pair: EUR/USD
• Stop Loss: 25 pips below entry

Calculation:

Step 1: Determine maximum risk
$5,000 × 0.01 = $50 max risk

Step 2: Determine required pip value
Required Pip Value = Max Risk ÷ Stop Loss Pips
Required Pip Value = $50 ÷ 25 pips = $2.00 per pip

Step 3: Determine lot size
EUR/USD: $1.00/pip = 0.10 lot
Need $2.00/pip = 0.20 lots (2 Mini Lots)

Trade Execution:

• Lot Size: 0.20
• Stop Loss: 25 pips = $50 risk (exactly 1%)
• Target: 50 pips = $100 profit (2:1 R:R)

This is professional risk management in action.

Summary

You've mastered the universal measurement system of Forex:

Professional Application:

• Calculate pip value BEFORE every trade
• Use pip value to determine exact lot size for 1% risk
• Measure all performance in pips (scalable, comparable)

Frequently Asked Questions (FAQ)

Q1: Do I need to manually calculate pip value for every trade?

No—but you MUST understand the concept.

Modern Trading Platforms:

• Automatically calculate pip value
• Display in your account currency
• Update dynamically as exchange rates change

When Manual Calculation Matters:

• ✅ Learning phase (understand mechanics)
• ✅ Verifying platform calculations
• ✅ Comparing brokers
• ✅ Planning trades before platform access

The Key Skill: Knowing pip value exists and using it for position sizing—not memorizing formulas.

Q2: Why do JPY pairs use 2 decimals instead of 4?

Historical and practical reasons:

Unit Value Difference:

• 1 EUR = ~1 USD (close to 1:1 ratio)
• 1 USD = ~150 JPY (100:1+ ratio)

Equivalent Value:

• EUR/USD moving 0.0001 (1 pip) ≈ 0.01% change
• USD/JPY moving 0.01 (1 pip) ≈ 0.0067% change
• Similar magnitude, different decimal placement

Knowing the definition of a pip is passive knowledge—calculating its value and using it for risk management is active, professional skill.

Action Item: Open your free demo account and practice pip calculations with different lot sizes on EUR/USD and USD/JPY. Watch how pip value changes with lot size and observe the difference between standard pairs and JPY pairs.

Proceed to Lesson 4: Lot Sizes (Micro, Mini, Standard) — The Foundation of Position Sizing