1. Introduction
What is “pips” in FX trading?
When you start FX trading, you will inevitably hear the term ‘pips (pips)’. This pips is the smallest unit used to represent currency price movements. It may feel a bit difficult for beginners, but it is an important factor in calculating profits and losses in FX trading.
Purpose of the article
In this article, we will explain from the basic definition of ‘What is 1 pip?’ to specific calculation methods, the impact on trading, and even points that beginners should pay attention to, in an easy-to-understand way. By the end of reading this article, you will understand the following.
- The basic meaning of 1 pip
- How to calculate profits and losses using pips
- Trading strategies that utilize pips
This content allows those who are thinking of starting FX or already trading to reaffirm the importance of pips.
2. What are pips? Basic definition
Meaning of pips
Pips refer to the smallest unit of price movement in foreign exchange (FX) trading. Currency pair prices are displayed to a certain number of decimal places, and the smallest price movement among those is called a pip.
For example, if the currency pair is USD/JPY (US dollar/Japanese yen), 1 pip equals 0.01 yen. Conversely, for EUR/USD (euro/dollar), 1 pip equals 0.0001 dollar. Thus, the value of a pip varies depending on the currency pair.
Difference between pips and points
The term ‘point’ is also used in the FX industry, but its definition can vary by broker. Generally, 1 point is treated as equal to 1 pip, but on some trading platforms, a point may represent an even finer unit, so caution is advised.
3. How to Calculate Pips (with Examples)
Basic Calculation Methods
The method for calculating pips varies by currency pair as follows.
- USD/JPY (Dollar/Yen)
- If the price moves from 130.00 yen to 130.01 yen, that change equals 1 pip.
- Formula: 1 pip = 0.01 yen
- EUR/USD (Euro/Dollar)
- If the price moves from 1.1000 dollars to 1.1001 dollars, that change equals 1 pip.
- Formula: 1 pip = 0.0001 dollars
Concrete Calculation Examples
Example 1: For USD/JPY
If the price moves from 130.00 yen to 130.05 yen:
- 130.05 – 130.00 = 5 pip change
Example 2: For EUR/USD
If the price moves from 1.1000 dollars to 1.1025 dollars:
- 1.1025 – 1.1000 = 25 pip change
Using Calculation Tools for Beginners
Many FX broker platforms include a feature that automatically calculates pips. Especially for beginners, using these tools can help prevent calculation errors.
4. Relationship between pips and profit/loss
pips and profit/loss calculation formula
In FX trading, changes in pips directly translate to actual profits and losses. The basic formula to calculate this is as follows.
Profit/Loss amount = pips × trade size (lots)
- pips: The smallest unit of change in the exchange rate.
- Trade size (lots): The unit of currency used in the trade. One lot typically represents 100,000 units, but there are also mini lots (10,000 units) and micro lots (1,000 units).
Specific profit/loss calculation examples
Example 1: Trading USD/JPY
- The exchange rate rises from 130.00 yen to 130.10 yen (a 10-pip change).
- If the trade size is 1 lot (100,000 units).
- Formula: 10 pips × 100,000 units × 0.01 yen = 10,000 yen profit
Example 2: Trading EUR/USD
- The exchange rate rises from 1.1000 dollars to 1.1050 dollars (a 50-pip change).
- If the trade size is 1 lot (100,000 units).
- Formula: 50 pips × 100,000 units × 0.0001 dollars = 500 dollar profit
Impact of spread on profit/loss
The spread refers to the difference between the selling and buying prices. This difference is also expressed in pips and is calculated as an actual transaction cost.
For example, if the spread on USD/JPY is 0.3 pips, a cost of 0.3 pips is incurred at the moment the trade starts. Therefore, if the price does not move more than the spread, you cannot make a profit.
Note: Impact of leverage
Using leverage allows large trades with a small amount of margin. However, because changes in pips can amplify not only profits but also losses, risk management is important.
5. Trade Strategy Using Pips
Short-Term Trading (Scalping)
Scalping is a short-term trading strategy that targets a few pips to a few dozen pips per trade. Because trades are frequent, choosing currency pairs with tight spreads is key to success.
- Key Points:
- Currency pair examples: USD/JPY, EUR/USD (tight spreads)
- Profit target: about 5–10 pips
- Risk management: set stop‑loss line at about 3–5 pips
Mid-Term Trading (Day Trading)
In day trading, you target the price movement of a day (tens to hundreds of pips). By setting a large pip target, you can trade stably without being affected by short‑term price swings.
- Key Points:
- Currency pair examples: GBP/USD, AUD/USD (large price movements)
- Profit target: 30–50 pips
- Risk management: set risk‑reward ratio at 1:2 or higher
Long-Term Trading (Swing Trading)
Swing trading is a strategy that holds positions for several days to several weeks. To capture large trends, you expect price movements of several hundred pips or more.
- Key Points:
- Currency pair examples: EUR/JPY, NZD/USD (trends are likely to emerge)
- Profit target: 100–200 pips
- Risk management: set stop‑loss line near the trend’s support line
How to Manage Risk Using Pips
In risk management, pips help set stop‑loss levels and determine trade size. Let’s use pips as follows.
- Setting Stop‑Loss Levels:
- Consider the currency pair’s volatility and set the stop‑loss level appropriately.
- Example: If the daily average movement is 50 pips, set the stop‑loss at 30–40 pips.
- Calculating Risk‑Reward Ratio:
- Set the ratio of target profit to acceptable loss (risk‑reward ratio) at 1:2 or higher.
- Example: target profit 100 pips, stop‑loss 50 pips.
6. Important Points for Beginners
Understand the Importance of Pips Calculation
The first mistake beginners often make is misunderstanding or miscalculating pips. Pips form the basis for calculating profits and losses, and if this understanding is vague, unexpected results can occur in trading.
Common Mistakes
- Insufficient consideration of trade size (lots):
- Focusing only on the price movement of pips and neglecting the impact of trade volume on profits and losses.
- Example: A 1-pip move results in a ¥1,000 profit or loss for 1 lot (100,000 units), but only ¥100 for 0.1 lot (10,000 units). Not understanding this difference leads to inadequate risk management.
- Ignoring the spread:
- Calculating without considering transaction costs (the spread).
- Countermeasure: Since costs are higher for currency pairs with wide spreads or volatile markets, check the spread before trading.
Differences Between Domestic and Overseas Brokers
The definition of pips and trading conditions can differ between domestic and overseas brokers. Failing to understand these differences may lead to unintended trading outcomes.
Features of Domestic Brokers
- Typically display prices to the second decimal place (e.g., 130.00 yen).
- Spreads are often tight, but leverage is lower (up to 25x).
Features of Overseas Brokers
- Display prices to the third or fifth decimal place (e.g., 1.10001 dollars).
- They offer high leverage (up to 500x or more), but the risk is also greater.
Note: Overseas brokers may have looser regulations, so always verify their reliability.
Key Points of Risk Management
Setting Stop-Loss Levels
Using pips to set stop-loss levels helps prevent excessive losses.
- Recommended example:
- Determine stop-loss levels based on the average daily price movement of the currency pair (ATR: Average True Range).
Considering Risk Tolerance
Taking too much risk in a single trade is a no‑no. It is common to limit risk to within 1–2% of the trading capital.
- Example: If you have ¥1,000,000 in capital, limit a single loss to ¥10,000–¥20,000 (equivalent to 10–20 pips).
7. Summary
Key Takeaways
In this article, we explained the following points about “pips,” which are essential for FX trading.
- Basic definition of pips: The smallest unit of price movement in currency exchange.
- How to calculate pips: Different calculation rules and examples for each currency pair.
- Relationship with profit and loss: The formula for calculating P&L and the impact of spreads.
- Trading strategy: How to use pips for short-term, medium-term, and long-term trades.
- Points to note for beginners: Calculation errors, choosing a broker, and risk management tips.
Next Steps
- Practice with a demo account:
- Use a demo account to practice calculating pips.
- Learn related information:
- We recommend exploring related topics such as “What is a lot?” and “How spreads work.”
8. Frequently Asked Questions (FAQ)
1. What is the difference between pips and points?
Pips refer to the smallest unit of an exchange rate. On the other hand, points vary by broker or trading platform and may refer to a finer unit (for example, one-tenth of a pip). When trading, be sure to check the specifications of the platform you are using.
2. How much profit can I make with 1 pip?
It depends on the trade size. For example, a 1‑lot position (100,000 units) on USD/JPY will result in a profit or loss of 1,000 yen per pip. A 0.1‑lot position (10,000 units) yields 100 yen per pip.
3. Are there recommended practice methods for beginners?
Using a demo account is the best approach. You can practice pip calculations and trading strategies without any risk.
4. Should I choose a broker with a small pip spread?
Choosing a broker with a tight spread can reduce trading costs. However, the broker’s reliability and support system are also important criteria.
5. How can I prevent pip calculation errors?
You can prevent calculation mistakes by using automated calculation tools or platform features. It’s also important to have a solid understanding of the calculation method.
Reference Sites
通貨ペアにより異なります。 ■pips（読み方：ぴっぷす） FXで通貨ペアの値動きを表す際に統一の単位として使わ…
JFX株式会社「」のよくある質問詳細ページになります。…
