What are Pips in Trading | Trading Basics 2025

If you are a FOREX trader, it is likely you will hear the term pip every day of your trading life. As you become more experienced, you will learn how to apply this term and you will get better at making pip calculations like they are second nature. This brief article intends to strip the term and its application down to the basics so you can understand what a pip is and how to use it. 

A pip (percentage in point) is the smallest price movement in most currency pairs, typically measured to the fourth decimal place (0.0001). For pairs involving the Japanese yen (JPY), a pip is measured to the second decimal place (0.01). The value of a pip depends on lot size and currency pair volatility, affecting profit and loss calculations. Understanding pip movement helps you set accurate stop-loss and take-profit levels, making it a fundamental concept for risk management and trade execution.

What is a Pip?

A pip is a term you will encounter often in FOREX trading. Let us remember what the FOREX world is about – people and organizations trade global currencies matched in pairs to make it easier to tell how strong or weak one currency is in relation to the other. In the FOREX world, a pip is a measure of how much the value between two currencies changes. 

As we have said, the relative value between currency pairs is shown in number form with four decimal places. A pip represents the last of those four decimals and is, therefore, a small unit of change. Why bother with such small values? Well, the FOREX world uses generous leverage and high volumes of FOREX change hands. So, pips, as small as they are, matter.

Here is an example. Let's say that at today’s exchange rate, one euro will buy you 1.0532 US dollars. If you were trading the euro against the US dollar, one pip would be the smallest movement that could take place between the two currencies. If the EUR/USD (you always quote the base currency first) moved from 1.0532 to 1.0533, or even 1.0534, that 0.0001 change in value is one pip. 

Pips and Profitability

How do pips work when it comes to actually making money from trading? An investor who trades the EUR/USD will make a profit if the euro appreciates in value relative to the US Dollar. Here are the steps involved. Let us say you are a FOREX day trader. On Monday morning, you use EUR10,000 from your euro-denominated FOREX account to buy USD10,053.90 at a EUR/USD rate of 1.0539. Now, you hold this USD amount in your account and wait for the market to swing your way.

At lunchtime on Monday, a major announcement in the US reveals that economic prospects are poor. The US dollar weakens based on pessimistic sentiment from market players. Now, the EUR/USD rate shifts to 1.0531, a change of 0.0008, or eight pips. Sensing an opportunity, you quickly convert the US 10,053.90 back to euros, at a rate of EUR/USD 1.0531. By the end of the day, you now have EUR10,007.60, more than you started with in the morning. You have thus made a profit of EUR7.60.

This very simplistic example does not consider fees and commissions and does not account for leverage, which is a way of opening much larger positions than the capital in your account. With some brokers, you can leverage your trades as much as 200 times over, using 200:1 leverage. The example here is meant to illustrate the function of a pip at its most basic level. 

You might think this is a small profit for one trade, but the example does not show that day traders can easily enter and exit hundreds of trades per day with lightning-fast execution like ECN trading and even use algorithmic trading bots that place trades on your behalf. Additionally, when you trade on margin, you enter these large positions with some of the broker’s money and some of your own, so you don’t need as much capital. 

Further, the amount of volatility between major currencies like the EUR and USD is very small compared to the amount of volatility (and number of pip differences) between a major currency and an emerging currency. This means you could make even more money if you successfully traded major currencies against minor currencies. There is a world of possibilities regarding how to make money in FOREX, and the humble pip is at the centre of it all.

The Bottom Line

As a trader, you will need to become accustomed to this very important term. Pips are the smallest unit of change in value between two currencies. Learning how to use this term so that it becomes second nature will serve you very well over the course of your trading career. Even if you change FOREX brokers, the rules of pips do not change, meaning you can easily read charts and indicators from any broker with whom you choose to work.