What are Pips on Forex

Continue expanding your knowledge in our exclusive reading articles! Today, we spotlight pips—an abbreviation for "percentage in point”, their meaning is also fundamental. Why are they important? They act as the smallest unit of price movement in currency trading, allowing traders to measure fluctuations with precision. Without a solid grasp of pips, navigating Forex markets would be like driving blindfolded. This is one of the easiest topics to learn, especially if you break it down into practice. Without further ado, let's get started.

What is a pip: meaning

Commonly said, a pip is the smallest measurable price change in a currency pair. You can find their measures in the online quotation table of your broker. Imagine the USD/JPY rate rising from 1.1111 to 1.1112—congratulations, you've just witnessed a 1-pip movement! These tiny things determine the trajectory of your trades. The moment your position is open, the price movement—quantified in pips—dictates your financial outcome. So we advise watching them as closely as possible. Imagine them as a kind of “thermometer”: they help traders to estimate the temperature of volatility and react to any changes in time. Every price jump is a language of financial markets and pips are its letters. The better you understand them, the more confident you feel. We propose to initiate the liberation exercise with a set of necessary knowledge that will definitely be useful in practice.

How to count them: practical steps explained

There isn't really anything difficult about it, especially at the beginning. Their calculation in most cases is reduced to simple arithmetic operations: subtraction and division. To count pips in the Forex market, you need to take into account the currency pair and the peculiarities of its quotation. In the majority of cases, 1 pip = 0.0001 (that's the fourth decimal place).

Here are some examples:

Imagine that you are trading the GBP/NZD currency pair, where the exchange rate changes by four decimal places. You open a buy trade at 1.9215, expecting a rise.

However, the next day the market opens with a gap and the new quote is 1.9268.

Subtract the initial price from the new one:

1.9268 - 1.9215 = 0.0053

Since 1 pip in GBP/NZD = 0.0001, divide the difference by the minimum price step:

0.0053 ÷ 0.0001 = 53 pips

You have earned 53 pips thanks to the gap, however, it is important to take into account the possible floating spread, which can reduce the final profit. A single pip might seem small, but in high-volume trading, even a slight fluctuation can result in significant gains or losses.

Why they are important to consider

Many people think what pips don't matter at all, because they're just numerical values. They're not. It just shows their lack of involvement in the subject. We don't advise ignoring pips, as they are the ones that help you see a significant difference in price. Take a look at the list we have compiled below to see what else they can be useful for:

• Identify shifts in asset valuation.

• Estimate potential earnings or setbacks.

• Establish risk boundaries and secure gains.

• Analyze price turbulence and its intensity.

• Gauge the efficiency of trading strategies over time.

Pips vs points: what is the difference

Confusion over terms happens from time to time, which is why we encourage you to learn everything correctly. It's not that difficult when you start to actively apply knowledge through experience. There are cases when people say “point” instead of “pip”, and it is not because they have been taught wrong, it is all about the difference in trading systems. Yes, this point is also worth paying attention to and learning to see. Sometimes 1 point = 0.1 pips (the fifth decimal place). So, if the EUR/USD price changed from 1.10500 to 1.10510, this is a movement of 1 point or 0.1 pips. But most often traders use the word “pip” and consider it as the fourth decimal place (0.0001).

How to use in trading

First, you need to choose a currency pair, because they have their own peculiarities. Some currency pairs may have high volatility, while others may have lower volatility, and these spread values, in turn, will allow us to calculate the risk/profitability ratio. Let's take the following cases:

• EUR/USD — moves 50-100 on average per day.
• GBP/JPY — can jump 100-200 on average per day.
• USD/JPY — usually calmer (30-70 on average per day).

Strategy selection

Your strategy affects an unlimited number of factors, such as how many pips you will earn in each trade, what risks you will take and how you will manage the trade. Let's look at three examples, pay close attention:

Scalpers (those who trade on short time frames) aim to catch 5-20 pips of profit per trade.

Day traders close out trades throughout the day, making 30-100.

Medium-term traders hold trades for several days or weeks, waiting for 100-500.

If the chosen strategy does not match your trading approach or risk tolerance, you will either make minimal profits or face excessive losses. Choosing the wrong trading tactics can result in your profits being a drop in the ocean and your losses being a storm that sweeps away your deposit.

How to set your stop loss and take profit correctly

When you are ready to risk 20 pips for the sake of potential income of 40 pips, your risk-reward ratio is 1:2 (potential profit is twice as much as possible loss). This approach allows you to avoid rapid depletion of your deposit and contributes to stable capital growth in the long term. Successful trading is not about winning every trade, but managing risks effectively to maximize long-term profitability.

Estimating the value of a trade

Now you know where and how to look for and how to calculate pips, so before entering the market be sure to make sure how much 1 is worth. If you have 0.1 lot, each pip is equivalent to 1 dollar. It means what the price changes by 100 pips, your financial result — whether profit or loss — will be 100 dollars.

Beginner's mistakes

We continue to break down the top mistakes among traders to simplify your experience. It is a self-evident fact that this is valuable knowledge at the beginning. Don't neglect it. If you happen to commit them, don't panic or get upset, but rather do a proper cold analysis. Analyzing the mistakes made by other traders allows you to anticipate possible risks and build a more competent strategy of capital management.

For this purpose, we have gathered them below:

• Ignoring the correct calculation of the pip value is a direct way to unjustified losses, when the trader himself does not realize how significant each microdetail of the price movement is.
• Setting a stop-loss at a minimum distance from the trade entry is like keeping the door open in a storm: the slightest market fluctuation can knock you out of your position even before the main trend starts.
• Underestimating the volatility of an asset leads to ridiculous decisions, such as taking a 5 pip profit on a pair that breaks a hundred in a day. This is like trying to fill the ocean with a teaspoon.
• Confusion between pips and points can be fatal, especially if your broker uses quotes with five decimal places—one careless move can turn potential gains into unnecessary losses.

These are not just numbers, in fact, behind them there is a whole system of understanding the market, which forms a successful trading strategy. It is vital for beginners to learn how to count pips in different situations. The best way is to practice on a demo account, where you can master the logic of calculations without fear of losing money and feel the dynamics of the market, so you learn to feel them as a musician feels the rhythm. Moreover, by knowing the most common cases of failure, you can prevent them from happening.

Conclusion

We hope you found this article useful, as we have tried to include the most important definitions and mechanisms. Pips are a peculiar language of price changes on Forex, without understanding of which trading turns into a game of chance. It is like trying to navigate in an unfamiliar city without a map: you can move around, however, there is a high probability of a dead end. We wish you successful trading!