In the forex markets, traders measure profit and loss using a standardised unit called a pip. Short for “percentage in point” or “price interest point”, a pip acts as the heartbeat of currency movements, tracking the smallest changes in exchange rates.
Think of pips as the DNA of forex trading – they form the basic structure that helps traders measure and communicate price changes. A pip equals 1/100 of 1% (one basis point) and traditionally appears in the fourth decimal place of a currency quote.
Forex pricing has changed significantly since electronic trading began. Initially, currency pairs were quoted to four decimal places, with a pip being the smallest possible move in that final digit. Trading technology advanced, and many brokers now offer quotes to five decimal places for more precise pricing. These smaller movements, called “pipettes”, allow for more accurate trading and tighter spreads.
The pip remains constant across all trading platforms and brokers. Whether trading through a London bank or a Tokyo broker, a pip means exactly the same thing. This standardisation is crucial – it ensures traders can discuss positions, profits and losses clearly.
When traders set a 50-pip profit target or a 30-pip stop-loss, there’s no room for confusion. This precision helps with risk management and strategy planning.
Pips serve several key functions:
- Position size calculation
- Stop-loss and take-profit placement
- Volatility measurement
- Performance comparison across currency pairs
- Clear communication between traders
While markets now offer tighter spreads and more precise pricing, pips remain the fundamental measure in forex trading, ensuring all market participants work with the same standards.
The Pip Calculator
Try the lot calculator below to understand how lot sizes affect your potential gains or losses in pips. This is for demonstration purposes only—depending on the currency pair you’re trading, the pip value may vary.
