What are pips in Forex and how to calculate their value?

21 February 2020

Pip means “Percentage in Point” and is the measurement of the minimum price change of a currency pair. It represents the change of one currency against another, both of which are represented in a Forex pair. Pips, for the majority of pairs, represent the fourth number after the decimal point (0.0001), while for others, pip measures the second number after the decimal point (0.01).

In Forex, there are two ways of measuring the received payouts: either a trader can measure them in the actual currencies or use a pip formula. Many traders prefer the second method because it is more flexible and the value is easier to calculate.

The difference between the two calculation methods is a result of how prices change in currency pairs. In many pairs, change occurs at a deeper level, that’s why their pips are calculated in more detail (0.0001). On the other hand, price changes in the pairs like USD/JPY are bigger, which require a less detailed calculation (0.01).

After the trade is over and traders have received a certain number of pips, they need to calculate the actual value of those pips. Usually, the service provider does that for them automatically, but it’s still a useful skill to have.

So, how to calculate pip values? There are three elements needed for this job: the pip itself (usually 0.0001), the current exchange rate of the currency pair, and a lot size the trader made. To put it simply, one has to divide one pip by an exchange rate and then multiply it by the lot size.

What does pip stand for in Forex?

Forex trading is based on the price changes of the currency pairs. And the most popular method of calculating those changes is via pips. The reason for that is instead of the actual value in a currency, pips represent the changes in units which then can be easily transformed into different currency values.

So, what is a pip anyway? A pip measures the price change of the currency pair. As for the pip meaning in Forex, the term is an abbreviation of “Percentage in Point” and is considered the smallest change an exchange rate can make on the market.
How to calculate pip

For example, if somebody bought the USD/CNY (US dollar/Chinese yuan) currency pair at a price of 1.2456 (theoretically) and then sold it at the selling price of 1.2455, the difference between the prices will be one pip.

Both traders and service providers (brokers) are actively using pips to calculate their payouts. But one thing to keep in mind is that there are two main ways of determining pips for currency pairs:

Pips for the most pairs (0.0001)
Pips for the JPY pairs (0.01)

there are also

Nano pips for the most pairs (0.00001)
Nano pips for the JPY pairs (0.001)

Pips for the majority of pairs

The more stable currency pairs such as EUR/USD or USD/CNY use a different method of how to calculate pips . For them, a pip represents the fourth place after the decimal point - 0.0001. In the above-mentioned example, we used this method: the fourth number from the decimal point in 1.2456 is 6, therefore, the change at that position of 0.0001 generated one pip. If the selling price was 1.2454, we would get 2 pips (6-4=2).

The majority of currency pairs use this calculation method. So, let’s imagine that a trader buys a USD/CNY pair at the current price of 6.9876. Then, he/she waits for a while until the price increases a little bit. One can expect that because prices on currency markets change all the time.

Now, let’s assume that the USD/CNY price increased to 6.9879. That is usually the time when traders tend to sell their pairs on the market. So, the difference between the two prices is 0.0003. Therefore, a trader has generated three pips as a result of the trade.

Pips for the JPY pairs

Now, even though almost all currency pairs use the above-mentioned method, there is one group of currency pairs that uses a slightly different method. This method is used for calculating pips Forex currency pairs that include the Japanese yen. For example, the USD/JPY pair uses the second number from the decimal point, instead of the fourth one, to determine pips.
pip meaning in forex

For example, the exchange rate on the USD/JPY is currently at 103.56, meaning that a person can buy 103.56 Japanese yens for 1 US dollar. So, just like above, let’s imagine that a trader buys this pair at this current price.

Now, let’s assume the price goes up at 103.59 and that same trader decides to sell the pair. The difference between 103.56 and 103.59 is 0.03, therefore, the trader will receive 3 pips.

Nano pips

Now, even though these two methods are the most popular in Forex, there is one more measurement method that is more accurate than the previous ones. It is called nano pip or “pipette.” According to the nano pip Forex definition, it represents the price change of the fifth number after the decimal point, instead of the fourth one.

For example, if the above-mentioned USD/CNY exchange rate was to increase from 6.9876 to 6.98794, the difference would be 0.00034 and a trader would get 34 nano pips. And for the Japanese yen pairs, nano pips are measured in the third place after the decimal. This method is important for reflecting the slightest changes in prices that could be easily missed otherwise.

Calculating the value of pips in Forex

Now that we know what pips in Forex are, as well as their variations, and how to measure them, let’s see how to actually calculate their value. As mentioned earlier, service providers usually calculate the values automatically, however, knowing how it is done is still useful.

The pip value is basically a price of one pip generated in a Forex trade. And it varies from one currency pair to another. That’s why it’s important to measure the pip value for different currencies.

So, to calculate the pip value, traders need to divide the number of pips (either by 0.0001 or 0.01 standards) by the current exchange rate of the currency pair, and then multiply that figure by the lot size (standard, mini, or micro). And the received number will be a value of one pip in the base currency (the second currency in a pair). But when a pair has the USD as a base currency, the pip value will always be $10.

First off, let’s assume that a trader opened a position for one lot (CNY100,000). So, if the USD/CNY currency pair has generated 2 pips, and the current exchange rate is 6.9876, the value of the pips will be calculated like this: (0.0002/6.9876)x100,000=2.86. So, the trader has received 2.86 US dollars from the trade.

Pips in CFDs

So, we have answered the question of “in Forex what is a pip?”: a pip is a measurement of the change in currency pair prices. However, they can also measure other assets. For example, CFD (contract for difference) is one of the popular forms of trading which uses not the assets themselves, but the contracts about their price movements to conduct a trade.

Pip Forex definition

For example, the two contractors make a deal that the price movement in the EUR/USD exchange rate will decide if a trader gets a payout or not. This way, there is no need to actually buy the currencies.

So, to calculate the size of the payout, the contractors still use pips. In CFD trading, like in Forex and other markets, a pip represents the smallest change in the asset price that can also influence the CFD. For example, if the contract has a EUR/USD pair as an underlying asset, one pip will be 0.0001 change in the price (or something different which the contractors agree upon). And since the base currency is USD, one pip will have $10 of value.

What is a pip and how to calculate it? - A summary

To sum it all up, Forex trading uses pips to measure the difference in price movements of the currency pairs. There are two main measuring methods: one for the majority of pairs (0.0001), and the other for the JPY-based ones (0.01).

The majority of currency pairs like EUR/USD or USD/CNY use the first method because the changes are rarely larger than 0.0001 or 0.001 - that is, larger than 1-10 pips. But the currency pairs that have Japanese yen as the base currency always use the second method because the changes are much larger.

Apart from these two measurements, there’s actually another variation of pips called nano pips. They are used for greater accuracy and are measured by the fifth number after the decimal point (0.00001) or the third one (0.001) if we’re talking about JPY.

And if someone still asks what is pips in Forex and how to measure their value, they will need to divide the number of pips by the current exchange rates of a given pair, and then multiply that number by the size of their lot. But for the USD pairs, one pip is always $10.

FAQ on pips in Forex

What are pips in Forex trading?

What is a pip in Forex? It is the least amount of change in a price of the currency pair. If the price goes up or down in a certain amount, you can either use the nominal terms to describe that change or use a Forex pip instead.

For the majority of currency pairs, Forex pips represent the fourth number after a decimal point. But what does this mean and how to calculate pips in Forex in real life? Let's say the price for the USD/TRY increased from 7.9678 to 7.9698, which means the change was 0.0020, i.e. 20 pips. And in any pair that has the USD in it, 1 pip equals to 10 USD, and in this example, you generated 20 pips meaning you've received 200 USD.

But the pips in Forex JPY pairs are a bit different; instead of the fourth place, pips on those pairs represent the second number after the decimal point. For example, if the price of the EUR/JPY increased from 123.43 to 123.53, the change would be 0.10, and the pip definition Forex payout for this change is 10 pips, i.e. 100 USD.

What is a pip formula in Forex?

As explored in this guide to what are pips in Forex, the pips are used to measure the buying and selling price difference between the currency pairs. There are two main formulas used to measure them:

The first formula is used for most currency pairs. It uses the fourth number after the decimal to determine the pip. So, if the difference between prices is 0.0002, the trader will have generated 2 pips.

The second formula is used for those pairs that use Japanese yen as a base currency. The change in, say, the USD/JPY pair is so rapid that the above-mentioned method would generate thousands of pips. Instead of that, the industry has established an alternative method that uses the second number after the decimal point to determine a pip. So, if the difference is 0.04, a trader will get 4 pips.

How to determine the pip value?

After calculating the number of pips received from the trade, the next step is determining the actual value of those pips. To do that, traders need three elements: the number of pips, the current exchange rate of the pair, and the size of the lot made by a trader.

So, here’s how it goes: the number of pips is divided by the exchange rate, and the resulting number is multiplied by the size of the lot. The pip value can vary from time to time because the exchange rates change all the time.