The term "pip" is a fundamental concept in trading, particularly in the forex market, and a key element that every trader should understand. In this article, we will delve into the meaning of a pip, how to calculate it, and its practical application in everyday trading activities. 

By understanding pips, traders can make informed decisions, accurately calculate their trades, and effectively manage their investment strategies. Whether you're new to trading or looking to deepen your expertise, this article will provide valuable insights into the role of pips in the dynamic world of forex trading.

1. What is a pip with examples

The unit of measurement to express the change in value between two currencies is called a “pip”, also referred to as a price interest point. According to forex market convention, a pip is the smallest whole unit price move that an exchange rate can make.

Most currency pairs are priced out to four decimal places and a single pip is in the last (fourth or second) decimal place.

There are also brokers that quote currency pairs beyond the standard “4 and 2” decimal places to “5 and 3” decimal places, like Mitrade. These are referred to as fractional pips, also called “points” or “pipettes.”

Suppose the price of EUR/USD was 1.13452. After a price movement, if the price of EUR/USD is now 1.13482, it changes by 0.00030, 30 points or 3 pips (from 1.13452 to 1.13482).

There are also currency pairings with 3 decimal places such as USD/JPY. Suppose the price of USD/JPY was 143.118 and after a price movement, if the price of USD/JPY rose to 143.178, it changed by 0.60, 60 points or 6 pips (from 143.118 to 143.178).

Here are some more examples of the pip values for various major forex pairs (Using the data from Mitrade):

2. How to read pip on trading screen

Reading pips on a trading screen is essential for understanding price movements and making informed trading decisions. Here's a step-by-step guide on how to read pips on a trading screen:

Example: 

Figure 3: USD/CAD price chart (Source: Mitrade)

Figure 3 shows the USD/CAD forex pair's price chart, where we can see the exchange rate and its change over time compared to the opening price in the top right corner.

The open price: 1.37856

The current price: 1.37832 

=> Change: 1.37856 - 1.37832 = 0.00024 or 2.4 pips 

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3. How to calculate the value of a PIP

4. FAQs about pips

#4.1 How is a pip different from a pipette?

A pipette is a fractional pip, representing a smaller unit of movement. For most currency pairs, a pipette is the fifth decimal place (0.00001), and for JPY pairs, it's the third decimal place (0.001). One pip is equivalent to 10 pipettes.

#4.2. How do fractional pips (pipettes) affect trading?

Fractional pips, or pipettes, provide additional precision in price movements. This can be useful for high-frequency trading or for managing very tight spreads. They allow traders to better fine-tune their entries and exits.

#4.3. How do pips affect my trading strategy? 

Understanding pips helps traders set realistic profit targets and stop-loss levels. It also aids in risk management by allowing traders to calculate the potential impact of price movements on their trades

#4.4 What is the significance of pips in risk management?

Pips are crucial in risk management as they help traders measure potential losses or gains. By calculating the pip value and setting stop-loss and take-profit orders in terms of pips, traders can manage their risk and ensure that their trading strategies align with their risk tolerance.