Do you trade Forex, but don’t understand what a pip/point is? Then you are unlikely to succeed! After all, these are the fundamental units of measurement that determine profit or loss in Forex trading, and trading without a clear understanding of these concepts is like going to an exam without a pen.

But understanding the basic terms is your first step toward making informed decisions quickly and effectively. In this article, ParadTrade explains what a pip and pip are, how they are calculated, and why they are important in Forex trading.

Pip vs point: what’s the difference?

The pip is a standardized unit of measurement for price movements in the Forex market. Traditionally, for most currency pairs, pips are expressed in the fourth decimal place. For example, if the EUR/USD pair moves from 1.1200 to 1.1201, this represents a one pip move. However, there are two exceptions:

  • For a group of Japanese Yen currency pairs that are expressed to three decimal places, so the pip for such pairs is calculated to the second decimal place.
  • For the “Precious Metals” group, which are displayed with only two decimal places, where one point is equal to 0.01.

Is there a difference between the terms “pip” and “point”? Traders often use the word “points” as a synonym for pips. In most cases,  pips can refer to the same concept as pips, denoting the smallest price movement. However, it is important to recognize this interchangeable usage and also to delve into the nature of the particular situation to determine the intended meaning.

Although pips are widely used in Forex, other financial markets may have their own traditions. For example, in the context of stock indexes, pips/points may represent a specific numerical value rather than a standardized percentage.

Therefore, traders should adapt their understanding of pips and points depending on the market they are trading. Knowledge of market conditions ensures accurate analysis and effective communication within the trading community.

How to calculate pip/point value in Forex?

The cost of an item depends on the following two factors:

  • quoted currency;
  • trade volume;
  • transaction volume.

Based on these factors, a fluctuation of even one point can have a significant impact on the value of an open position.

The cost of 1 point is calculated using the following formula:

cost of 1 pip = (point in decimals * transaction volume)

Why are pips and points important?

Understanding pip value allows traders to quantify and analyze market movements. Profits and losses in Forex trading are often expressed in pips. By knowing the value of one pip, traders can calculate potential profits or losses depending on the size of their position and movements in the exchange rate.

When trading with brokers, spreads are shown at regular points on company websites. Spreads are typically measured in pips, which is the smallest unit of price movement for a currency pair. An example of a 2 pip spread for EUR/USD would be 1.1051/1.1053.

As we mentioned above, Japanese Yen currency pairs are only quoted to 2 decimal places (if there are no fractional points, then it is 3 decimal places). For example, USD/JPY would be 110.00/110.04. This quote indicates a spread of 4 pips.

Pips and pips play a crucial role in risk management. Traders often set stop loss and take profit orders based on a specific number of pips or points, allowing for a structured approach to risk mitigation. Therefore, understanding the difference between pips and points is an integral part of effective position sizing.