Pip in Forex trading is short for Percentage in Point. It represents one of the most important terms used by Forex traders around the world every single day. Pip shows the minimum possible price movement in the Forex trading market and can be a very important thing to understand for traders. When you are trading Forex, you will notice that the price of a certain currency pair is shown in five digits in the majority of cases. The pip is the change in the last digit of a currency pair price.
In most cases, traders use pips to describe the price movements in the Forex trading market. Forex pips definition as well as the whole idea behind it is very simple and understanding it should not be much of a challenge for traders.
There are several types of pips available in the Forex trading market, and it indicates the price movements of currency pairs. Understanding this term can be a very important thing for traders, as it is used very frequently in the market. So, follow our comprehensive guide to Forex trading pips and see what they really stand for.
Forex pip explained – What is it?
In simple terms, pip is an incremental price change of a currency pair in the Forex trading market. In the Forex trading market, pip is used to show how much the price of a certain currency pair has changed. For the majority of Forex currency pairs, a pip stands for the fourth number after the decimal point, meaning 0.0001.
The main reason for pip being so detailed is that the price change in the Forex trading market is mostly very little. Thus, the process of calculating pip must be more detailed in order for traders to not lose huge amounts of money in just one trade. Because the price of the Forex pairs is shown in much greater detail, it lets investors use higher leverage, which can increase the profit made even from the slightest movement in the market.
Although pip is known to be the fourth number after the decimal point for the majority of the currency pairs, this is not true for all of them. For example, pip for the JPY currency pairs stands for the second number after the decimal point, which stands for 0.01. That said, the idea behind pip for Forex is the same in any situation. It simply is an indicator of how much the price of a certain asset has changed.
How does Forex pip trading work?
Understanding how pips work in the Forex trading market can be a very important thing for traders. The pip in the Forex market is one of the most important terms. For example, if you are a trader who uses fundamental analysis for trading, understanding how pip works can be of great importance since it is used by news outlets very frequently to describe the price movements in the market.
To better understand how pip in Forex works, let’s discuss a specific Forex pip example. As we have already said, for the majority of the currency pairs in the market, pip stands for the fourth number after this decimal point. So, let’s say that you are trading EUR/USD currency pair, which is the most traded pair in the market. Say that the price of the currency pair was 1.1925, and it went up to 1.1928. This information is enough to say that the price of the EUR/USD currency pair has increased by 3 pips (8-5=3).
On the other hand, if you hear that the price of the currency pair decreased by 3 pips, you can assume that it has become 1.1922 (5-3=2). The Forex pip formula is very simple, all you have to do is to see what the price of the currency pair was at some point, and compare it to the price it has become. The same method of calculation should be used when dealing with JPY currency pairs.
How are pips and lots connected?
To make sure that you understand a pip, you should also learn a little about other terms in the Forex trading market, such as lot. In fact, Forex pips and lots and mostly viewed as inter-connected terms and are used very frequently together. Let’s say that you are trading one lot of EUR/USD, meaning that the position is worth 100,00 euros. In the case of this currency pair, as we have already said, a pip equals 0.0001.
The currency value of on eForex pip for one lot is 100,000 x 0.0001, which equals $10. This way, you can easily calculate that the profit or loss will be $10 per pip for this currency pair. This means that if your positions are successful when you are trading one lot size of the currency pair, every time the price changes according to your prediction, for every pip, you receive 10 euros. On the other hand, if your prediction was wrong, you will be losing 10 euros per pip.
So, yes, it can be said that Forex lots and pips are heavily interconnected with one another and it is very important for traders to understand the meaning behind these two. Although at first, it might be a little complicated to understand the meanings of different Forex trading terms, in reality, it should not be as difficult. The major terms in the Forex trading market are actually quite simple.
Other types of pip in Forex trading
As we have already said, there are two main types of pips available in the market. For the majority of the currency pairs, one pip equals the fourth number after the decimal point, as for the JPY pairs, one pip is the second number after the decimal point. While the process of calculation is exactly the same for both of them, there are some differences between them.
The main difference is that one pip change in JPY pairs might be more impactful than one pip change in the majority of the currency pairs. The main reason for this is that for the majority of the pairs, a pip represents a smaller portion of the price, while for the JPY pairs, it is a bit higher.
While Forex trading comes with minimal changes that can have hardly any effect on the individual trades, the majority of traders in Forex are using higher leverage, which increases even the slightest movements in the Forex trading market. While leverage can be very helpful in the Forex trading market, traders should also keep in mind that there are numerous risks associated with higher leverage.
As much as it can increase the profits made while trading Forex, higher leverage can also increase the losses of Forex trading. Because of this, it is very important for traders to know exactly what they are doing in the market before taking any major steps.
Pip Forex trading – Pipette
As we have already said earlier in this guide, there are several different types of pips in Forex trading. While the pip itself represents the smallest possible price movement in the market, there also is another term that is used sometimes in Forex trading to describe even smaller price movements in the market, this is called nano pip, or sometimes pipette.
Nano pips work exactly the same way as the actual pip itself, however, it is an even smaller portion of the price movement in the market. Although it is not offered by every Forex broker in the market, it is still available on numerous Forex brokers around the world.
In most cases, the majority of brokers offer pipettes for traders who still do not have enough experience in the Forex trading market. This way, traders can gain more experience by trading according to the smallest possible changes in the price of the currency pairs.
Another great thing about nano pips in the Forex trading market is that they are known to be more accurate when compared to regular pips as they provide even the tiniest change in the currency pair price. For the majority of the currency pairs in the market, nano pips stand for the fifth number after the decimal point. As for other currency pairs, such as the JPY currency pairs, pipette stands for the third number after the decimal point.
So, if we go back to our Forex pip example above and say that you are trading EUR/USD currency pair but in this case, the price is shown including pipettes, you would see something similar to this: 1.19257. If the price of the currency pair went down by 3 pipettes, you can automatically get that the price now is at 1.19254. Although not as popular as regular, standard pip, there still are many people around the world who are using pipettes to better understand the price movements in the market.
Why is such a small change important?
Forex trading is one of the most active markets around the world. The prices of the currency pairs are changing very fast in the market, however, these changes do not happen in greater numbers. In most cases, the price of a certain currency pair moves 50-100 pip a day, which is not a huge movement.
Because the prices are moving at such a rate, it is very important to understand the things that these changes could cause. Forex traders are using these tiny changes in currency prices to generate higher profits. This is possible thanks to the Forex broker that offers traders access to leverage.
Without leverage, it would be almost impossible for Forex traders to generate higher profits. The main reason for this is that the prices are removing at a very low range in the market. The leverage, which is used by a huge majority of all Forex traders around the world, gives investors the ability to transform changes of just a few pips into huge profits.
However, it should also be noted that leverage is something that should be used by Forex traders with a lot of care. Among many traders, Forex trading leverage is seen as a double-edged sword, meaning that as much as it can be helpful, it also increases the risk that comes with Forex trading.
Final thoughts on Forex trading pips
As we have discovered in this Forex pip guide, pip stands for the percentage in point and is a representation of the smallest price movement in the market. Pip represents one of the most important terms in Forex trading and is used very actively by traders around the world.
Understanding Forex pips is not that hard, as it is a very simple concept. For the majority of the currency pairs around the world, one pip equals the fourth number after the decimal point in the currency pair price. However, for the currency pairs, such as JPY pairs, one pip is the second number after the decimal point.
This is not all, however, there also are other types of pips available in the Forex trading market, known as the nano pipes, or simply pipette. These are even smaller price changes in the market and stand for the fifth number after the decimal point in the case of the majority of pairs, and the third number of JPY pairs.
Frequently Asked Questions on Forex pip size
What exactly does a pip in Forex mean?
In the Forex trading market, pip stands for the percentage in point and is a representation of the price movements in the Forex trading market. Thanks to pips, we are able to say how much a price of a certain currency has changed. Pip is an universal term, however. it works a bit differently for some of the currency pairs.
For the majority of the currency pairs, one pip stands for the fourth number after the decimal point (0.0001), as for the JPY pairs, it stands for the second number after the decimal point (0.01).
How many pips do Forex move in a day?
Saying an exact number that the whole market moves are not easy. There are numerous Forex trading currency pairs available in the market, while some of them move about 100 pip a day on average, others move only about 20 pip a day. The number of pip that the price of a currency pair moves depends on numerous factors. This includes the activity during the day in the market, ongoing events around the world, and many others. One of the currency pairs in the market that moves a lot is the GBP/USD currency pair, which can move as much as 160 pips a day. However, saying that it moves this much every day is not correct, as there are days when it only moves about 50 or 60 pips a day.
What is a pipette?
Pipette in the Forex trading market is an even smaller change in the currency pair price than the pip. Pipette in the Forex trading stands for the fifth number after the decimal point for the majority of the currency pairs, while for the JPY pairs, it is the third number after the decimal point. Pipette shows the price movements in the Forex trading market in greater detail, thus, it is very popular among many traders.
