What is a Pip in Forex? – Understanding the Basics

One of the most common terms that forex traders will come across is a ‘pip’ – which refers to the percentage in point movement of a currency pair.

Not only do pips enable traders to assess the spread on a currency pair, but also the gains or losses on an open position.

In this beginner’s guide, we explore the question – what is a pip in forex?

A Closer Look at Forex Pips – Understanding Pips in Forex

Beginners must ensure that they have a solid understanding of pips in forex before embarking on a trading journey.

Not only will this help the trader assess micro currency movements in terms of profit and loss, but also how to evaluate the competitiveness of the spread.

In this section of our guide on what is a pip in forex, we explore the fundamentals in more detail:

Indicator of Price Movement

First and foremost, as noted above, a pip refers to a basic point. In other words, one pip amounts to 1/100th of a percentage. This means that there are 100 pips for each percentage movement. So, if a forex pair increases by 3 percent, this price movement can also be referred to as a 300 pip gain.

• In many cases, online forex brokers will display currency prices with four digits after the decimal point.
• For example, as of writing, GBP/USD is trading at 1.1473. If the price of this pair drops to 1.1470, this represents a decline of 3 pips.

However, there are exceptions. For example, pairs containing the Japanese yen typically only have two digits after the decimal. As such, if USD/JPY moves from 140.56 to 140.60, that’s a price increase of 4 pips.

Another exception to keep in mind is that some forex brokers display 5 digits after the decimal or 3 in the case of JPY pairs. This means that the additional unit at the end of the price is referred to as a pipette. Put simply, a pipette amounts to 1/10th of a standard pip.

So, if GBP/USD were to increase from 1.14730 to 1.14739, that’s a positive price movement of 9 pipettes. Alternatively, this price increase can be referred to as 0.9 pips (10% of 9 pipettes).

Learn More: Read our guide on how trend trading can help assess potential forex pip movements.

Pips and Spreads

The overwhelming majority of online brokers will display their spreads in terms of pips. As noted, the spread is the difference between the buy and sell price of a forex pair.

This is why forex trading platforms always display two different prices.

For example, in the screenshot above, the EUR/USD pip value is trading at a buy price of 0.99164. The buy price of this pair is 0.99158. The difference between the two prices is 6 pipettes. However, most brokers would advertise this spread as 0.6 pips.

In another example, the buy and sell price of USD/CAD amounts to 1.31650 and 1.31630, respectively. In this case, the spread amounts to 20 pipettes or 2 pips. This might be viewed as high for a pair like USD/CAD. However, at the time of writing, currency markets in US and Canada are currently closed.

Nonetheless, major pairs typically come with the tightest spreads. While minors and exotics are often less competitive. Crucially, the more volatile a particular forex pair, the higher the spread in pips.

Slippage

When discussing slippage, this is almost always viewed in terms of forex pips. In a nutshell, slippage occurs when the trader gets a different price than what they placed the order at.

This typically happens when a market order is placed, as in the seconds that it takes to execute, the respective pair will have changed in value.

• For example, let’s say that the trader is looking at EUR/CHF
• The trader goes long via a market order at 0.97525
• This means that the forex broker will execute the order instantly at the next best available price
• However, the order is actually filled at 0.97529
• This means that the trader suffered a 0.2 pip loss due to slippage

The best way to avoid slippage is by placing limit orders, which allows the trader to specify the price at which the position should be executed by the broker.

Profit and Loss

Some traders will calculate and report their profit and loss for the months in terms of pips. This enables the traders to get a birds-eye overview of how they performed during the month.

In order for this information to be useful, the trader would also need to keep track of their stake per pip.

For example:

• Let’s say that the trader goes long on EUR/USD at 0.99000
• The trader decides to stake $10 per pip
• Within a few hours, EUR/USD has increased to 0.99800
• This represents a price increase of 80 pips
• The trader staked $10 per pip, so that’s a profit of $800

With that said, using pips to calculate profit and loss isn’t the most efficient way of doing things. Instead, it’s best to view this in percentage terms. After all, there are many factors to take into account, such as spreads, stakes, and leverage.

How to Use Pips When Trading Forex

What is a pip in forex used for? Well, in order to understand how the value pips in a currency pair, it is important to first have an idea of how forex lots work.

Put simply,  when banks, hedge funds, and other financial institutions trade currencies with one another, they do so in lots. Each lot will amount to 100,000 units of the base currency from within a pair.

For example:

• GBP/USD: The base currency of this pair is GBP. Therefore, 1 lot of GBP/USD amounts to £100,000
• EUR/USD: The base currency of this pair is EUR. Therefore, 1 lot of EUR/USD amounts to €100,000
• USD/CAD: The base currency of this pair is USD. Therefore, 1 lot of USD/CAD amounts to $100,000

Now, it goes without saying that most retail clients won’t be trading forex in lots. On the contrary, retail clients will typically trade micro-lots. This amounts to 1% of a lot. So, a micro lot of USD/CAD would amount to $1,000.

So why is this relevant in the context of this guide on what is a pip in forex? Well, because micro lots and thus – smaller stakes are being traded, pips allow traders to assess the price movement of a currency pair.

In the section below, we explore how to calculate forex pips based on the lot size.

What is a Pip Value Calculator Used for?

There are forex pips calculators readily available in the online space – many of which are offered by online brokers.

As such, it’s just a case of entering the specifics of the trade – in terms of the lot size and respective pair, and the calculator will display the respective pip valuer.

With that said, it wouldn’t be wise to head straight for a forex pip calculator without actually understanding how the data is generated.

Therefore, let’s look at a couple of examples to help clear the mist:

Example 1: USD/CAD

Let’s start with USD/CAD, which, at the time of writing, is trading at 1.31651. This means that for every 1 USD, 1.31651 CAD is received.

Moreover, a standard lot of USD/CAD amounts to 100,000 units, or $100,000.

Therefore, the pip calculation is as follows:

USD/CAD has an FX rate of 1.31651: (.0001 / 1.31651) x 100,000 = $7.60 per pip 

This means that as per the above, each pip movement when trading USD/CAD is worth $7.60

Example 2: GBP/USD

Now let’s look at another example. This time, we’ll use GBP/USD – which,  at the time of writing, is trading at 1.14901.

This means that for every 1 GBP, 1.14901 USD is received.  Once again, a standard lot of GBP/USD amounts to 100,000 units, or £100,000.

Therefore, the pip calculation is as follows:

GBP/USD has an FX rate of 1.14901: (.0001 / 1.14901) x 100,000 = £8.70 per pip 

This means that as per the above, each pip movement when trading GBP/USD is worth £8.70.

Where to Trade Forex with Tight Spreads – Popular Forex Platforms Reviewed

This guide on what is a pip in forex trading has explained the fundamentals in layman’s terms. To recap, the pip is a vital tool when assessing how competitive the spread of a forex pair is, as per the broker that is offering the respective market.

Therefore, in this section, we will discuss the best trading platforms to consider when searching for forex brokers with tight spreads.

Note: Still exploring what pips mean in forex trading? If so, it’s best to start off with a forex demo account.

1. Capital.com – Trade 138 Forex Pairs at 0% Commission

Capital.com is a regulated trading platform that offers thousands of markets – all of which are represented as contracts-for-differences, or CFDs. This is inclusive of 138 forex pairs, as well as stocks, indices, ETFs, hard metals, energies, and cryptocurrencies.

This trading platform is ideal for trading forex without breaking the bank for several reasons. First, when making a debit/credit card or e-wallet deposit, the minimum required amounts to just $20 ($250 on bank wires). Moreover, Capital.com offers micro lots. This means that users can trade 0.01 of a standard lot – or 1,000 currency units.

Capital.com offers competitive spreads that start from just 0.6 pips when trading EUR/USD. Best of all, there are no forex trading commissions to pay at Capital.com. This popular CFD provider offers access to two different trading platforms. This includes its own native web-based and mobile platform, and the latter is compatible with iOS and Android phones.

The other option is to connect Capital.com to MT4. This option might suit those in the market for a pip value calculator. That is to say, through MT4, Capital.com users can assess the value of a pip without needing to perform a manual calculation – as we did earlier on in this guide.

When trading through Capital.com, retail clients can access leverage of 1:30 on major pairs. Those looking to trade minor or exotic pairs will be offered leverage of 1:20. Both long and short positions can be entered, which gives traders the opportunity to speculate on both rising and falling currency trends.

Capital.com is also popular for its educational materials. This includes everything from forex trading videos and guides to market insights, financial news, and an economic calendar. Capital.com accounts take less than five minutes to open and the provider is authorized and regulated by the NBRB, FCA, ASIC, and CySEC.

Your capital is at risk. 80.61% of retail investor accounts lose money when trading CFDs with this provider.

2. eToro – Popular Forex Broker With Low Fees and Copy Trading

With more than 25 million clients, eToro is one of the most popular forex brokers in this space. The platform enables clients to get started with an account in just five minutes, and most nationalities are only required to deposit a minimum of $50 ($10 in the US/UK).

There are no deposit fees to fund an account in US dollars and supported payment types are inclusive of bank wires, debit and credit cards, Paypal, Skrill, Neteller, and more. eToro also offers swap-free accounts to those that are followers of the Islamic faith.

Standard accounts at eToro offer access to the forex markets across 49 pairs. Trades are executed on a spread-only basis and start from 1 pip per slide on EUR/USD. eToro offers access to leverage, with retail clients capped to 1:30 and 1:20 on majors and minors/exotics, respectively. The minimum trade size here is just 0.01 lots or 1,000 currency units.

Therefore, a trader entering a $1,000 position on EUR/USD with leverage of 1:10 would only need to stake $100 from their account balance. Negative account balance is supported by eToro, which is crucial for beginners. The platform is heavily regulated too, with licensed issued by the SEC, CySEC, FCA, and Australia.

Beginners might also wish to check out the eToro flagship feature – Copy Trader. After selecting a successful trader to copy, this feature will mirror all future buy and sell orders automatically. Therefore, eToro users can trade currencies passively. eToro also offers a free demo account to all registered users alongside a newbie-friendly mobile app.

Learn More: Read our full eToro review:

78% of retail investor accounts lose money when trading CFDs with this provider.

Conclusion – What are Pips in Forex Trading

Understanding what are forex pips, is crucial when assessing how competitive (or expensive) brokerage spreads are when trading currencies. Crucially, the tighter the spread is in terms of the pip, the cheaper it is to enter buy and sell positions.

Capital.com is perhaps the best forex broker for accessing low spreads – with EUR/USD costing just 0.6 pips and no commissions are charged.

The minimum first-time deposit at Capital.com is just $20 on debit/credit card and e-wallet payments, albeit, the platform also offers a free forex demo account to registered users.

80.61% of retail investor accounts lose money when trading spread bets and/or CFDs with this provider.

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