What is a Pip in Forex?

If you’ve ever had a conversation with a forex trader, the word “pip” has probably come up. Most often, you’ll hear how many pips a currency has moved or how many pips the trader has gained or lost in a trade or with a particular trading strategy.

If you’re a new forex trader, your conversation can run the gamut from interesting to pretty confusing. No worries. Benzinga will help smooth out your “pip” knowledge.

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IG is a comprehensive forex broker that offers full access to the currency market and support for over 80 currency pairs. The broker only offers forex trading to its U.S.-based customers, the brokerage does it spectacularly well. Novice traders will love IG’s intuitive mobile and desktop platforms, while advanced traders will revel in the platform’s selection of indicators and charting tools. Though IG could work on its customer service and fees, the broker is an asset to new forex traders and those who prefer a more streamlined interface.  

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• New forex traders who are still learning the ropes
• Traders who prefer a simple, clean interface
• Forex traders who trade primarily on a tablet

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• Easy-to-navigate platform is easy for beginners to master
• Mobile and tablet platforms offer full functionality of the desktop version
• Margin rates are easy to understand and affordable
• Access to over 80 currency pairs

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• U.S. traders can currently only trade forex
• Customer service options are lacking
• No 2-factor authentication on mobile

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Billing itself as the world’s 1st eco-friendly broker, CedarFX makes it easy to trade and give back to the planet. You can choose a 0% Commission Account or an Eco Account — or open multiple accounts to meet all your needs. 

CedarFX offers access to a wide range of tradable securities, including stocks, futures, major and exotic forex pairs, cryptocurrencies and more. Though CedarFX could introduce a few additional educational resources, the broker remains a unique option for traders invested in giving back.

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• Forex investors
• Investors interested in 0% commission or eco conscious trading
• Investors looking for 24/7 customer service

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• Allows users to offset their carbon footprint
• 0% commission investing
• Offers demo account access
• 24/7 customer service available through live chat
• Eco Account Option (10 trees planted for each lot traded)
• Fast deposits/withdrawls with Bitcoin

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• Limited number of educational resources for new investors

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FOREX.com is a one-stop shop for forex traders. With a massive range of tradable currencies, low account minimums and an impressive trading platform, FOREX.com is an excellent choice for brokers searching for a home base for their currency trading. New traders and seasoned veterans alike will love FOREX.com’s extensive education and research center that provides free, informative forex trading courses at multiple skill levels. While FOREX.com is impressive, remember that it isn’t a standard broker.

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• MetaTrader 4 users
• Beginner forex traders
• Active forex traders

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• Impressive, easy-to-navigate platform
• Wide range of education and research tools
• Access to over 80 currencies to buy and sell
• Leverage available up to 50:1

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• Cannot buy and sell other securities (like stocks and bonds)

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Though Australian and British traders might know eToro for its easy stock and mobile trading, the broker is now expanding into the United States with cryptocurrency trading. U.S. traders can begin buying and selling both major cryptocurrencies (like Bitcoin and Ethereum) as well as smaller names (like Tron Coin and Stellar Lumens).

eToro offers traders the opportunity to invest their assets into premade portfolios or cryptocurrencies, similar to services offered by robo-advisors through traditional brokers. Though eToro isn’t a one-stop-shop for everything an investor needs, its easy-to-use platform and low spreads is a great way to enter the cryptocurrency market.

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• International Forex/CFD Traders
• New cryptocurrency traders looking for an easy-to-use platform
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• Simple platform that is easy to master
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• U.S. traders currently limited to cryptocurrencies
• Only 15 major coins available to trade

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HYCM is 1 of the world’s leading forex brokers, offering investors access to over 69 unique currency pairs. However, forex isn’t the only thing the broker offers — HYCM also offers high rates of leverage, stock and ETF trading, commodity investing and much more. Getting started with HYCM is quick and easy, and most investors can open an account in as little as 10 minutes.

HYCM offers a varying fee structure, which allows investors to choose the spread option that’s best for them. A wide range of educational and investing tools are available, which can be equally beneficial to both experienced and novice traders. Though HYCM isn’t currently available in the United States, it can be a great choice for residents of the other 140 countries where it offers service. 

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• Investors who want a customizable fee schedule
• Traders comfortable using the MetaTrader platform
• Islamic traders who need swap-free accounts that don’t build interest

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• Wide range of currency pairs available
• Excellent selection of educational tools
• $0 deposit and withdrawal fees

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• Not currently available to traders based in the U.S.

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100 EURO

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50+

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A fully regulated broker with a presence in Europe, South Africa, the Middle East, British Virgin Islands, Australia and Japan, Avatrade deals with mainly forex and CFDs on stocks, commodities, indexes, forex, cryptocurrencies, etc. This brokerage is headquartered in Dublin, Ireland and began offering its services in 2006. It offers multiple trading platforms and earns mainly through spreads.

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• Beginners
• Advanced traders
• Traders looking for a well-diversified portfolio

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• Controlled by regulatory agencies of multiple countries
• Choice offered in terms of trading platforms
• Support available in 14 languages and trading platforms in 20 languages
• Practice/demo account available for trying out
• Breadth of trading assets

Cons

• Does not accept customers from the U.S. as it isn’t regulated in the U.S.
• Transferring funds to the account may take up to five days; withdrawals could take up to 10 days

What is a Pip?

A pip is short for “percentage in point.” It’s the smallest measure of change for a currency pair and it is not the same for all currency pairs. A change of a pip for most currency pairs is measured in four decimal points (0.0001), but you can also find currency pairs where a change of a pip is a change of 0.01.

How Do You Use a Pip?

To show how much they’ve gained or lost in a trade, forex traders use pips. The profit you make on a trade can be expressed in the amount of money you’ve made, but that depends a lot on the size of a trade and other factors. You can use different lot sizes in forex trading, which makes trades harder to compare. With pips, it is much easier to compare trades across the currency pairs and lot sizes.   

There are many forex trading strategies based on a price movement. Some traders might decide to open a short position if the currency pair makes a sudden move lower. In this strategy, the size of the move would be defined by the number of pips the currency pair has lost over the observed time frame.

You could also measure a typical move for a currency pair by calculating the average true range (ATR) indicator. Its value is presented in pips and it shows a range of a movement for a currency pair in the chosen period and time frame. With the indicator, you can get valuable historical volatility information that can help you in setting up your risk management strategy.

Forex brokers don’t charge trading fees, but they have bid-ask spreads. The bid-ask spread is the difference between the best bid price and the best ask price and it is expressed in pips. Brokers who want to make more money per trade will increase the spread. For a very liquid currency pair, the spread can be less than a pip. This is possible if you are trading with brokers that allow fractional pips.

How to Calculate the Value of a Pip

First, know that the amount of money you can gain or lose with a change of one pip in a currency pair depends on the size of your trade. The standard lots are 100,000 units, 10,000 units, 1,000 units, and 100 units.

In the following examples, you can find pip value calculations for the account with the U.S. dollar as the base currency. The calculation differs if the USD comes first or second in the name of the currency pair you’re trading.

If you’re trading the USD/JPY currency pair and use 100,000 units, a change of 1 pip would mean a change of $8.85. For 10,000 units, it would mean a change of $0.89.

To calculate the U.S. dollar value of a pip for the USD/JPY trade, divide 0.01 by the current exchange rate of the USD/JPY currency pair, which is 112.95. Then multiply by the lot size. The math looks like this: 100,000 x (0.01/112.95) = $8.85.

You can see that the exchange rate plays an important part in the calculation. Let’s see what happens if the exchange rate changes significantly. What is the value of 1 pip if the USD/JPY currency pair drops to 95? Using our formula, 100,000 x (0.01/95), the answer is  $10.53. If it jumps to 130, the result changes to $7.69.

For the USD/CHF currency pair, a change of 1 pip would be a change of 0.0001. The value of a pip for the current exchange rate of 0.9974 is $10.03, for a lot of 100,000 units.

When you trade currency pairs like GBP/USD or EUR/USD, the value of a pip is $10 for a lot of 100,000 units. To buy 100,000 euros, you need $113,360 USD, at the current currency rate of 1,1336. If it changes to 1,1337, you’ll gain $10.

Final Thoughts

A pip is very useful as a measure of the move for currency pairs. It allows you to compare trades in any currency pair, and a trade can be compared regardless of trade size or the exchange rate of the currency pair you’re trading. It can also help you to evaluate the risk for the currency pair.

You’ll also get important information about its volatility and trading range. It can be cumbersome to manually calculate the value of a pip, so most brokers have pip calculators that simplify the process for you.