A pip — short for "percentage in point" — is the smallest standard price increment most forex pairs trade in. On the major pairs (EUR/USD, GBP/USD, AUD/USD, USD/CAD, USD/CHF) a pip is the fourth decimal place: 0.0001. On JPY-quoted pairs (USD/JPY, EUR/JPY, GBP/JPY) a pip is the second decimal place: 0.01. Many brokers also quote a fractional pip — the "pipette" — as a fifth or third decimal, so 1.08501 displays as 1.0850 and 1 pipette.
Pips are how traders communicate distance, risk, and reward without referring to currency-specific decimals. A 30-pip stop means the same conceptual distance whether you trade EUR/USD or USD/JPY.
Formula
Pip value = (1 pip / exchange rate) x lot size in units
For USD-quote pairs: Pip value (USD) = lot size in lots x $10
Worked example
EUR/USD trades at 1.0850. You go long 1.0 standard lot. Each pip = $10.
- Price rises to 1.0870 — that is 20 pips, or +$200.
- Price falls to 1.0830 — that is 20 pips, or –$200.
USD/JPY trades at 150.25. You go long 1.0 standard lot.
- Price rises to 150.45 — that is 20 pips. Pip value = (0.01 / 150.25) x 100,000 = approximately $6.66, so 20 pips = +$133.
Why it matters
Pips normalize trade analysis across instruments and account sizes. Every stop, target, and average winner figure in a trader journal traces back to pip distance multiplied by lot size. Without pips, you cannot compare last week's GBP/JPY scalp to today's EUR/USD swing.
Common pitfalls
- Confusing pips with pipettes — a "5-pip stop" on a 5-decimal broker is actually 50 pipettes; misread it and risk is 10x intended.
- Assuming pip value is always $10 — it is only $10 per standard lot on USD-quote pairs, and varies on cross pairs.