What is a Pip? How to Calculate Profit/Loss per Pip?

Seeing a currency pair move from 1.1000 to 1.1050, and wondering how many baht that translates to in profit or loss? The answer starts with a small unit called a pip. If you don't understand this unit from the beginning, calculating the risk of your open position will be more guesswork than actual calculation.

This article explains what a pip is, how it differs from a pipette and a point, how to calculate pip value based on lot size, and why the figures may not be the same across all brokers.

What is a Pip?

A pip is the smallest unit of price change commonly used in the forex market. For most currency pairs, it's the fourth decimal place of the price (0.0001), except for pairs involving JPY, where it's the second decimal place (0.01).

Why JPY Pairs Have Different Decimal Places Than Others

The Japanese Yen has a much lower value per unit than the US Dollar. Therefore, quoting a currency pair like USD/JPY at around 150 does not require the same precision down to the fourth decimal place as pairs priced around 1, such as EUR/USD. The market thus stipulates that JPY pairs use only two decimal places. The meaning of 1 pip in these pairs is therefore 0.01, not 0.0001, as with most major currency pairs.

How Do Pip, Pipette, and Point Differ?

These three terms are often used interchangeably, leading to confusion, even though their meanings are not exactly the same.

The most common point of confusion for beginners is the term "point" because there isn't a single, universally accepted definition across the industry. Some trading platforms refer to the last decimal place as a point, when it is actually a pipette. When viewing prices on an unfamiliar platform, you should always check whether the moving number refers to a full pip or just a fraction of a pip.

How to Calculate Pip Value

Pip Value is the monetary worth of a 1-pip movement for an open position. The basic formula is:

Pip Value equals the size of 1 pip multiplied by the traded lot size

Standard lot sizes in the forex market are divided into three levels: A Standard lot equals 100,000 units of the base currency, a Mini lot equals 10,000 units, and a Micro lot equals 1,000 units. For currency pairs where USD is the quote currency (e.g., EUR/USD), the pip value per lot will be straightforward.

A Standard lot yields a pip value of approximately $10 per pip, a Mini lot approximately $1 per pip, and a Micro lot approximately $0.10 per pip.

Let's visualize this in Thai Baht for clarity. Assuming a reference exchange rate of 35 Baht per Dollar (a hypothetical figure for illustrative purposes only, not an actual rate), if you open a Standard lot on EUR/USD and the price moves by 1 pip, it equals a profit or loss of approximately 350 Baht. If you open only a Micro lot, the same movement would result in only about 3.50 Baht per pip.

How Larger Lot Sizes Lead to Higher Pip Values

The relationship between lot size and pip value is linear. The larger the lot size, the more monetary profit or loss a given price movement will generate proportionally. The subsequent question is, what determines how large a lot you can open with the same amount of capital?

The answer is leverage. The higher the leverage, the less margin capital is required to open the same lot size, allowing the same initial capital to open a larger position. This means the pip value per 1-pip movement also increases, affecting both potential profits and losses. The true mechanism behind leverage figures is explained in What is Forex Leverage and How Risky Is It?

Real-World Example of Profit/Loss Calculation from Pip Movement

Suppose you open a Mini lot on EUR/USD with a pip value of approximately $1 per pip. If the price moves from 1.1000 to 1.1050, that's a 50-pip movement, resulting in a profit of approximately $50. If the price moves in the opposite direction to 1.0950 instead, it would be a loss of approximately $50 for the same number of pips.

Now, let's change only the lot size while the price movement remains the same at 50 pips. Opening a Standard lot (pip value of approximately $10) would immediately result in $500. Opening a Micro lot (pip value of approximately $0.10) would result in only $5. The price movement is exactly the same, but the monetary outcome differs tenfold at each lot size level. This is why knowing the pip value of your position in advance is more crucial than merely observing price direction.

Actual Pip Value Varies by Broker: How to Check Before Trading

The pip value figures calculated above are approximations only for currency pairs where USD is the quote currency. For other currency pairs without USD as the quote currency, or accounts opened with a base currency other than USD, the actual figures will require an additional layer of exchange rate conversion. This means the pip value displayed on different platforms may not be exactly the same, even for the same lot size on the same currency pair.

Furthermore, some brokers may round figures or include hidden fees that affect the actual profit/loss figures differently from basic formula calculations. This is not something you can guess; you must directly check with your broker's platform to see if the displayed pip value matches your calculations. A comprehensive checklist for verifying broker transparency can be found in Is Your Forex Broker Trustworthy? 7 Steps Before Depositing Funds

Frequently Asked Questions (FAQ)

Please Note: Forex trading is not yet licensed or regulated by any authority in Thailand. The Bank of Thailand does not have a policy to issue licenses for Forex business to retail investors (Reference: Thai PBS), and the SEC itself confirms that the Forex business is not under the SEC's supervision but rather under the currency exchange control law (Reference: The Standard).

This article is provided for general knowledge only and is not personal investment advice. No returns are guaranteed. Traders should conduct further research and assess risks independently before making any decisions.

How many points is 1 pip?

It depends on what "point" refers to in this context. If it means pipette, then 1 pip always equals 10 pipettes. However, if a platform uses the term "point" interchangeably with pipette or even pip itself, the meaning will not be the same everywhere. You must check with the platform you are using before interpreting.

How do pip and point differ?

A pip has a relatively standard definition across the industry: the fourth decimal place for general currency pairs. A point, however, has no fixed definition. Some platforms use it interchangeably with pip, while others use it to mean a pipette, which is 10 times smaller than a pip.

How is pip value calculated if the currency pair does not include USD?

An additional conversion through the exchange rate of your account's base currency is required. The resulting figure will not exactly match the basic formula for USD pairs. For such currency pairs, you should refer directly to the value calculated by your broker's platform instead of manual calculation.

What is the smallest lot size that can be traded?

Many platforms support Micro lots (1,000 units) as the minimum, and some even offer Nano lots, which are smaller. However, the actual minimum size varies by broker. You should check the terms before opening an account.

Summary

A pip is the fundamental unit used to convert price movements into actual profit/loss figures. The resulting figures are directly tied to lot size, and lot size is, in turn, tied to leverage. Understanding these three components together is essential for accurately assessing the risk of a position, rather than just observing whether the price direction is right or wrong.

Calculating pip value using the basic formula is a good starting point, but the actual figures on each broker's platform may always differ slightly from the formula. The same applies to the margin required per position; if it falls too low, it will lead to a margin call, which is explained in What is a Margin Call, When Does It Happen, and How to Prevent It?, and should be understood concurrently before committing real money.

References

• Thai PBS: Status of Forex Regulation in Thailand
• The Standard: SEC's Stance on the Forex Business