A pip, or point, is a way to measure price movement in the Forex market and determines the profit or loss of the trade. A pip in most currencies is 0.0001. For example, at the time of writing this article, the price of the EUR/USD is 1.0979. If it gains 10 pips, that means the price increases to 1.0989. Or conversely, if it moves to 1.0974 then this means the EUR/USD has lost 5 pips.
Some notable exceptions are the Yen pairs, which measures the price of a pip based on .01 price movement. For example, at the time of writing this article, the price of the USD/JPY is 113.50. If it increases to 113.58 then it has gained 8 pips. If it decreases to 113.45 then it has lost 5 pips.
When you have an open position, each upward or downward pip movement in the market price can be either a profit or a loss depending on which currency you bought and which currency you sold.
Calculating the Value of a Pip
Forex brokers typically allow you to choose the value of a pip based on whatever lot size you are trading. If you are trading on the MT4 platform, typically when you trade a lot size of 0.1, this means that the value of a pip is $1. So a trade that gains 10 pips, will gain approximately $10. I say approximate because your broker may charge fees for each trade or you may earn or charge interest on a trade that has been open overnight and this will affect your exact profit amount. The exception to this is if you are trading a micro account on the MT4 platform, then 0.1 lot size is 10 cents a pip.
Some Forex brokers allow a very large amount of leverage and small amount of margin, which in simple English means that you can trade a huge portion of your trading account at one time. This can be very dangerous because if the trade moves just a few pips in the wrong direction, you can wipe out your whole account. For example, let us say you have a $5000 account and you are trading 10 lots, which is $100 a pip. If you open a trade and the trade loses 50 pips, you could essentially wipe out your entire trading account in one trade!
It is vital that prior to entering a trade, you select a lot size that is reasonable considering your account balance so you do not over-leverage your account. The key to doing this is understanding the value of each pip earned or lost with the lot size you have selected.
If you aren’t sure about this, it is best to ask your broker directly. Or, if you need help determining a reasonable lot size to trade, we invite you to contact us at ForexSignal.com. We are happy to assist you with your Forex trading questions.
More Tools for Beginners
Are you a new Forex trader? Check out the Forex Trading Strategies For Beginners [ULTIMATE GUIDE].