Every gain and every loss in forex is measured in pips. When a trader says they made 50 pips today, they are describing the distance price moved in their favour. When they say they were stopped out for 30 pips, that is the distance price moved against them before their stop loss triggered. The pip is the universal unit of measurement in forex — and understanding exactly what it is, how it is calculated, and what it is worth in real money is the first practical skill of this course.
The Definition of a Pip
Pip stands for Percentage in Point, though the acronym matters less than the definition. A pip is the smallest standardised price movement in a currency pair. For the vast majority of currency pairs — all pairs that do not involve the Japanese yen — one pip equals 0.0001, which is the fourth decimal place of the price quote.
EUR/USD price moves from: 1.0850 to 1.0851 = 1 pip up 1.0850 to 1.0900 = 50 pips up 1.0850 to 1.0800 = 50 pips down 1.0850 to 1.0650 = 200 pips down
The number of pips a trade moves tells you the size of the price movement in standardised terms — independent of the currency pair or the actual exchange rate level. A 50-pip move on EUR/USD and a 50-pip move on GBP/USD represent the same relative price movement, even though the actual exchange rates of those two pairs are different.
How Pips Are Calculated
To calculate how many pips price has moved, subtract the entry price from the exit price (for a long trade) and count the result in units of 0.0001 for non-JPY pairs.
Long trade on EUR/USD: Entry: 1.0850 Exit: 1.0920 Difference: 0.0070 Pips: 0.0070 ÷ 0.0001 = 70 pips profit Short trade on GBP/USD: Entry: 1.2700 Exit: 1.2640 Difference: 0.0060 Pips: 0.0060 ÷ 0.0001 = 60 pips profit (price fell, you were short, so it is profit)
Pip Value in Dollar Terms
Knowing you gained 50 pips is useful. Knowing those 50 pips are worth $500 is what actually matters for risk management. Pip value is the monetary worth of one pip for a given position size. It varies by currency pair and lot size but follows a consistent calculation.
For pairs where USD is the quote currency — EUR/USD, GBP/USD, AUD/USD, NZD/USD — the pip value in USD is straightforward:
Standard lot (100,000 units): 1 pip = $10.00 Mini lot (10,000 units): 1 pip = $1.00 Micro lot (1,000 units): 1 pip = $0.10
This is why EUR/USD is so widely used for examples in trading education — the pip value is clean and easy to calculate. For pairs where USD is the base currency (USD/CHF, USD/CAD, USD/JPY), the pip value varies with the current exchange rate and requires a slightly different calculation — your broker's platform calculates this automatically.
JPY Pairs — The Exception
Japanese yen pairs follow a different convention. Because the yen has a much lower value per unit than other major currencies — USD/JPY trades around 140 to 160 rather than near 1.00 — the pip for JPY pairs is defined at the second decimal place: 0.01 rather than 0.0001.
USD/JPY price moves from: 149.50 to 149.51 = 1 pip 149.50 to 150.50 = 100 pips 149.50 to 148.50 = 100 pips down
The pip value for USD/JPY at a standard lot is approximately $6.70 to $7.00, varying with the current exchange rate. Again, your platform calculates this automatically — but understanding the principle behind the exception prevents confusion when you first look at a JPY chart and notice the price format is completely different.
Why Pips Matter
Pips are the language of risk management. When you set a stop loss, you are defining a pip distance from your entry. When you calculate position size (which you will do in detail in Course 11), you use pip value to determine how many lots to trade so that your maximum loss equals a predetermined dollar amount. Without understanding pips, position sizing is impossible — and without position sizing, risk management does not exist.
Professional traders think in pips first and dollars second. They define their stop loss in pips based on chart structure, then use pip value to calculate the correct lot size for their desired dollar risk. This sequence — pips first, then dollars — is the foundation of every trade they place.