Introduction
If you're new to forex or commodities trading, you may have come across the term "pip" and wondered what it means. A pip is a fundamental concept that every trader must understand, as it forms the basis for calculating profits, losses, and risk. In this article, you'll learn what a pip is, how to calculate it for different instruments like EURUSD and XAUUSD, and why it matters for your trading journey.
What is a Pip?
The word "pip" stands for "percentage in point" or "price interest point." In most forex pairs, a pip is the smallest standardized price movement—typically the fourth decimal place (0.0001). For example, if EURUSD moves from 1.1000 to 1.1001, that's a 1 pip move.
"A pip is the unit by which traders measure price movement and their gains or losses."
Some brokers quote prices to a fifth decimal, called a pipette (0.00001), but for most calculations, we stick to the classic pip.
Pip Value by Instrument
The value of a pip depends on the instrument you are trading. Here’s a quick overview:
| Instrument | 1 Pip Equals | Example Move |
|---|---|---|
| EURUSD, GBPUSD, USDJPY* | 0.0001 (JPY pairs: 0.01) | 1.1000 → 1.1001 (EURUSD) 145.00 → 145.01 (USDJPY) |
| Gold (XAUUSD) | 0.01 | 1920.00 → 1920.01 |
| Indices (e.g., US30) | 1.0 | 34000 → 34001 |
How to Calculate the Value of a Pip
The monetary value of a pip depends on your lot size and the instrument. In forex, a standard lot is 100,000 units, a mini lot is 10,000, and a micro lot is 1,000.
| Lot Size | Units | Pip Value (EURUSD) | Pip Value (XAUUSD) |
|---|---|---|---|
| Standard Lot | 100,000 | $10 | $1.00 |
| Mini Lot | 10,000 | $1 | $0.10 |
| Micro Lot | 1,000 | $0.10 | $0.01 |
Example: If you trade 1 mini lot (0.1 lot) of EURUSD, each pip movement equals $1. So, a 15 pip move = $15 profit or loss.
Calculating Pips in EURUSD
Let's say you buy EURUSD at 1.1000 and sell at 1.1020. That’s a 20 pip gain. If you traded 1 standard lot, your profit would be 20 pips × $10 = $200. For a mini lot, it would be $20, and for a micro lot, $2.
Pips in Gold (XAUUSD)
Gold is quoted to two decimal places (e.g., 1920.00). Here, 1 pip = $0.01. If XAUUSD moves from 1920.00 to 1920.50, that's 50 pips. For a 1 lot trade, each pip is worth $1, so a 50 pip move = $50.
Why Pips Matter
Pips are the universal language of forex and CFD trading. They allow you to:
- Measure and compare price movements across different instruments
- Calculate your potential profits and losses
- Determine your position size and risk per trade
- Set stop-loss and take-profit levels with precision
"Understanding pip value is essential for effective risk management and consistent trading results."
Common Pip Calculation Mistakes
Beginners often confuse pips with points or fail to adjust for different lot sizes. Always double-check whether your broker quotes in pips or pipettes, and confirm how pip values are calculated for each instrument you trade.
Summary Table: Pip Values by Lot Size
| Instrument | Standard Lot | Mini Lot | Micro Lot |
|---|---|---|---|
| EURUSD | $10 | $1 | $0.10 |
| XAUUSD | $1 | $0.10 | $0.01 |
Final Thoughts
Mastering pip calculations is a critical step for any trader. It empowers you to manage risk, set realistic goals, and track your trading performance accurately. As you gain experience, these calculations will become second nature.
👉 Try our free Lot Size Calculator to practice pip calculations and plan your next trade with confidence.
