Understanding Forex pips can be a little difficult for newer traders as pips are not used in equities or futures markets. This Forex pips tutorial will explain exactly what pips are, how they are used and how to calculate their values.
What is a Forex Pip?
‘Pip’ is an abbreviation of Percentage Interest Point. For the purposes of trading, A Forex pip represents the lowest tradable increment of any one currency. It is the unit used to measure the changes in the values of two currencies as they increase and decrease in relation to one and other.
In our Forex trading basics lesson we introduced currency quotations and exchange rates. Forex quotes are usually given to four decimal places. As far as pips are concerned, this means that a single pip would be worth 0.0001. In this case a one pip increase or decrease would result in a change in the last digit of the quote price. For example, if the EUR/USD is trading at 1.3626 then the price could rise one pip to 1.3627, or fall one pip to 1.3625. It is worth mentioning here that quotes containing the Japanese Yen (JPY) are only quoted to two decimal places, a one pip increase or decrease still changes the last digit and would have a value of 0.01.
Forex Fractional Pip Pricing
A lot of large brokers are now quoting prices using Forex fractional pips, which means quoting to five decimal places, except JPY pairs which are now quoted to three places. This allows more accurate quotes and means that the last digit on the right of any quotation represents only 1/10th of a pip, rather than a whole one. A pip does still however represent a 0.0001 change in price, so it is still the fourth decimal place digit that changes when price increases or decreases by a full pip.
A Forex quote from a broker using fractional pips would look like this 1.36263. If price increases by a pip then this changes to 1.36273, and a one pip fall leaves price at 1.36253.
Calculating Forex Pip Values
Each currency you trade obviously has a different value, so as you learn to trade Forex it will be helpful to be able to determine how much FX pips are worth for different currencies you work with.
First we will look at working out the Forex pip value where the USD is the base currency in the pair and quotes feature the standard four decimal places.
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USD/CAD 1.0081
In order to work out the Forex pip value in USD, simply take 0.0001 and divide it by the exchange rate.
0.0001/1.0080 = 0.0000992
Pip value = $0.0000992
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USD/JPY 82.86
Remember that in pairs which contain the JPY, one pip is worth 0.1, rather than 0.0001 so to get the pip values in USD here we just divide 0.1 by the exchange rate.
0.1/82.86 = 0.0000120
Pip value = $0.0000120
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For currency pairs where the USD is not the base, there is a little more work involved in you want to work out the USD value of the Forex pips you will win or lose in a trade.
GBP/USD 1.6082
In this example dividing 0.0001 by the exchange rate of 1.6082 will give us the pip value in GBP.
0.0001/1.6082 = 0.00006218 GBP
To convert this into USD, simply multiply the GBP pip value by the exchange rate.
0.00006218 * 1.6082 = 0.0000999 USD
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Here is another simple way to work out the value of FX pips:
To calculate pip value in the quote currency (the quote currency appears second in the pair), simply multiply one pip by the lot size. For example . . .
When trading GBP/USD one pip equals 0.0001.
If you are trading one standard lot (100,000) then the pip value in USD is:
0.0001 * 100,000 = $10
If you are trading one mini lot (10,000) then the USD Forex pip value is:
0.0001 * 10,000 = $1
If you want to then convert the pip value into the base currency (the first one in the pair) then simply divide the quote currency pip value by the exchange rate. So, if GBP/USD is trading at 1.6082 then to work out the pip value in GBP you would calculate . . .
$10/1.6082 = £6.21
Or
$1/1.6082 = £0.621
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If you have understood the above examples you have probably noticed that large amounts need to be traded if each pip is to be worth anything significant. A standard Forex lot of $100,000 USD will result in a pip size of $10, which is still not that much. Do not worry if you cannt afford to trade with these kinds of sums, most traders cannot. One of the key benefits of Forex trading is the use of leverage, allowing a trader to open position sizes much larger than they would otherwise be able to. For a full explanation of exactly how this works, see our comprehensive Forex leverage guide.
Hopefully this tutorial will help you to understand Forex trading pips and how to calculate their values for yourself. In reality, it is not really necessary to do these kinds of calculations manually while trading though. There are several free online tools which will help you to learn Forex trading by calculating the value of FX pips automatically. We personally like this one which allows you to see pip sizes and also tells you what position sizes you should be taking, depending on what percentage of your account you are prepared to risk on any one trade.
Forex Pip and Position Size Calculator
Feel free to leave any comments or questions you may have about Forex pips in the comments section below.
Further Reading
In addition to the other sections of this site linked to on this page, see our Introduction to Forex for an overview of FX markets, as well as our Forex for beginners guide.
