Pips and Profits
What is a Pip?
When you are into weightlifting, the common lingo of performance is
“I bench pressed 150 pounds today.”
When you are into forex, the common lingo of performance is pips: “I made 150 pips profit on my last trade”
or “My trade
was stopped out today and I lost 85 pips.” Ok, so what is a pip?Pip
is short for “percentage in point” or “price
interest point," and it is the smallest incremental price move
that a currency pair can make. It’s the last decimal point in exchange
rates or currency pairs
. Depending on context, this is normally
one basis point 0.0001 in the case of EUR/USD, GBD/USD, USD/CHF and .01
in the case of USD/JPY.
It is easy to see with examples.
Here is a 4-digit broker example:
Note: With 4 digit brokers, this last decimal point is 0.0001 for most
currency pairs, and 0.01 for Yen based currency pairs. The spread is 2
pips (1.3504-1.3502=2) on this Admiral Markets demo. If the EUR/USD
moves from 1.3502 to 1.3503, it would have moved ONE PIP.
Trade Sample on EUR/USD:
If you buy EUR/USD at 1.3505 and sell at 1.3525, you would have made 20
Trade sample on USD/JPY:
If you sold USD/JPY at 88.95 and exited at 89.25, you would have lost
Here is a 5-digit broker example:
With 5 digit brokers (also called fractional pricing brokers), the last
decimal point is 0.00001, or 0.001 for Yen based currencies, and it
represents a fraction of a pip. For example, the spread on the EUR/USD
is 0.9 pips (1.34995-1.34986) on this Alpari UK demo. If the EUR/USD
moves from 1.34986 to 1.34996, it would have moved 1 pip.
Trade Sample on GBP/USD:
If you bought the GBP/USD at 1.55508 and sold it at 1.56791, you would
have made 128.30 pips (1.56791-1.55508=128.30).
Because of the extra digit, it is harder to eyeball an exact pip spread
or pip profit without the aid of a calculator. But this eyeballing
problem of 5-digit brokers is outweighed by the larger advantage of
typically better spreads, i.e., lower transaction costs, compared to
their 4 digit broker counterparts.
The reason pips are so important is because they are the basis for
calculating the dollar profit or loss in forex trading, as we shall see
in the calculation of pip value (automatic and manual).
What is the difference between a pip and tick size and tick?
In Forex, the tick size
and pip are almost
synonymous. As we have seen, pip
is the smallest
incremental price move of a currency. Tick size
the smallest possible change in price - very similar. Just like
futures, the minimum possible amount that a price can move
also the market’s tick size
. With 4 digit brokers,
the EUR/USD has a tick size of 0.0001, which means that the smallest
increment that the price can move from 1.3840 would be up to 1.3841 or
down to 1.3839. The EUR futures market also has a tick size of 0.0001,
but the difference is that the tick size of one contract has a fixed
tick value of $12.50, meaning that for every 0.0001 that the price
moves up or down, the profit or loss of the trade would increase or
decrease by $12.50. In contrast, the tick size (pip or fraction of pip)
of forex pairs is not fixed to a dollar value, and is instead
calculated relative to the units traded (for Direct Rates), and also to
the exchange rate and base currency quote (for Indirect Rates and Cross
How to Calculate Pip Value and Profit/Loss Manually
Bear in mind that the calculation of the dollar pip value is done by
the broker automatically. However, for a number of reasons, it is
useful to know how to do it on your own.
The calculation of profit/loss is different depending on the currency
rate types, and there are three of them:
There is a way to calculate the pip value of each pair and multiply it
with the pip movement to derive the profit and loss in dollars.
If you don’t want to do pip value calculations, you can always use a
handy indicator that displays the pip value (along with bid, spread,
buy/sell swap rate) of a multiplicity of pairs.
Author: Hanover. This indicator will display the following info, for
all currency pairs offered by your broker:
- Symbol (A=AUD, C=CAD, E=EUR, F=CHF, G=GBP, J=JPY, N=NZD,
- Current bid price
- Daily range to date:ave daily range (DR as a % of ADR)
- Spread (spread as a % of ADR)
- Dollars per pip (per full lot traded)
- Swap paid(+) or charged(-) by broker on long and short positions
A picture of both this handy indicator applied to the AUDUSD chart of
FXPro looks like this:
The dollar per pip value appears as third from last column. UJ or
USDJPY has a pip value of 12.44 (one of the bigger ones), and AN or
AUDNZD has a pip value of 7.65 (one of the smaller ones). Notice that
the AUDNZD spread is one of the largest at 20 pips (4th from last
column), which is a whopping 28.9% of average daily range: as soon you
go long on this pair with a 100K lot, you would be down -$153 (20 pips
X 7.65). Not good. Thankfully, most pairs have a spread less than 5
pips and a pip value close to 10. Going long EU or EURUSD would incur a
spread cost of only 1.8 pips (2.8% of ADR) and at a pip value of $10,
you would be only down $18 on a 100K lot. This is a sizable difference
from the cost of trading AUDNZD.
Below are ways to calculate pip values and pip movements through
Direct rates are currency pairs where the USD is the quote currency
(the second currency being quoted i.e. XXX/USD). The common base
currency (first currency quoted) pairings include EUR, GBP, AUD, and
Below is a table illustrating how to derive the Pip Value, Profit /
Loss (P/L) in Pips, and the P/L in $USD
Note on Direct Rates:
Direct rates provide the easiest formula for calculating the pip value
(lot size * tick size). Because the pip value does not divide with the
current rate, as in the two rate formulas below, it remains the same
value between the direct rate pairs and each pair’s price fluctuations.
You can always remember that the pip value of a micro lot (1000 units)
is $0.1 (10 cents), that the pip value of a mini lot (10,000 units) is
$1, and that the pip value of a standard lot (100,000 units) is
Indirect rates are those currencies traded indirectly against the U.S.
Dollar (USD). For example, with USD/CAD, the USD is the "base
currency,” the CAD is the “quote currency” and the rate quote is
expressed as units per USD. USD/CAD trading at 0.9874 means that 1 USD
Note on Indirect Rates:
The only difference in pip value calculation between indirect rates and
direct rates is the division with the current rate (lot size * tick
size / currency rate). This division takes away from the more fixed
rate of the direct rates. It makes all the pip values between the
indirect rate pairs differ, and all the pip values will dynamically
change relative to the current rate that changes constantly.
Cross Rates are currency pairs that do not involve the USD.
Interestingly enough, though the USD is not represented in the quote,
it is used in the quote calculation. An example of a cross rate is the
EUR/CHF, where EUR is the base currency and CHF is the quote
Note on Cross Rates: The
difference between this formula and the indirect one is that in the
calculation of the pip value there is an extra multiple with the base
quote, which in this example above is the current EUR/USD price. This
makes the calculation a little more involved than the previous two.
These extra calculations with base quote and division with current rate
makes all the pip values between the cross rate pairs differ, and all
the pip values will dynamically change relative to the current rate
that itself changes constantly.
Here is a table breakdown of all the formulas, side by side:
Next Article: Transaction Costs