Pips are one of the most important concepts for forex traders to understand. This comprehensive guide will provide everything you need to know about pips, from what they are to how to use them to maximizing profits.
What is a Pip?
A pip (percentage in point) is the smallest price increment in the forex market. It represents the fourth decimal place in a currency pair quote. For example, if the EUR/USD pair is trading at 1.12345, the pip would be the 5 digit.
Each currency has its own pip value based on lot size:
- For standard lots (100,000 units), a pip is worth $10 for a 5-digit currency pair like EUR/USD.
- For mini lots (10,000 units), a pip is worth $1.
- For micro lots (1,000 units), a pip is worth $0.10.
So if the EUR/USD price changes from 1.12345 to 1.12355, it has moved up by 1 pip.
Why Pips Matter
Pips represent the amount of profit or loss on each trade. Traders aim to accumulate pips in order to increase their trading account size over time. More pips mean larger potential gains (or losses).
Knowing pips allows traders to calculate approximate risk/reward ratios for trades, determine appropriate lot sizes for accounts, set stop losses and take profits, and evaluate if a trading strategy is profitable.
Monitoring pips helps assess market volatility and direction in different sessions. Traders can gauge daily, weekly, and monthly pip ranges across currency pairs.
In summary, while each pip may be small, they add up significantly over time and are thus an essential component for forex trading.
Pip Values for Different Currency Pairs
The pip value varies across currency pairs based on the quote currency and exchange rate. Here are the pip values for some major pairs:
- EUR/USD: 0.0001 or $0.10 per micro lot.
- USD/JPY: 0.01 or $0.10 per micro lot.
- GBP/USD: 0.0001 or $0.10 per micro lot.
- USD/CAD: 0.0001 or $0.10 per micro lot.
- USD/CHF: 0.0001 or $0.10 per micro lot.
- AUD/USD: 0.0001 or $0.10 per micro lot.
- NZD/USD: 0.0001 or $0.10 per micro lot.
Exotic pairs like USD/SEK or USD/HKD have a pip value of $0.01 per micro lot due to their higher exchange rates.
Traders should confirm the exact pip value for their chosen currency pair and lot size before placing trades.
How Pips are Calculated
The fourth decimal point in exchange rates determines pip amounts. To calculate pips:
- Identify the current exchange rate with 5 decimal places, e.g. EUR/USD = 1.12345.
- Note the current 4th decimal value, in this case ‘5’.
- If the rate changes to 1.12355, the 5 has become a 6, so the EUR/USD has moved up by 1 pip.
- If the rate changes to 1.12255, the 5 has become a 2, so the pair has moved down by 3 pips.
Pip movements are always calculated from the perspective of the base currency. For EUR/USD, if the euro rises, the pair moves up in pips. If the euro falls, the pair moves down.
Pip Movement and Lot Sizes
As mentioned earlier, pip values depend on the lot size traded:
Standard lots: 100,000 currency units. Each pip movement is worth $10 profit/loss.
Mini lots: 10,000 units. Each pip = $1 profit/loss.
Micro lots: 1,000 units. Each pip = $0.10 profit/loss.
So for a standard lot EUR/USD trade, if you buy at 1.12345 and sell at 1.12390, you have captured 45 pips x $10 per pip = $450 profit.
Pip values remain fixed at these rates regardless of the exchange rate. A pip for USD/JPY is worth the same $0.10 as EUR/USD despite differences in the quote price.
Always double check your broker’s specific pip values based on lot size before executing any trades.
Factors that Impact Pip Movement
Several factors can influence how many pips a currency pair might move in a session:
- News Events: Major news like interest rate decisions or employment data causes above average pip movement. Pairs can move hundreds of pips in seconds after volatile events.
- Market Volatility: In volatile markets, pairs tend to see wider daily ranges and pip movements. In calmer markets, ranges tighten.
- Liquidity: When trading volume and liquidity is high, pairs can move more smoothly. Low liquidity tends to cause more erratic pip action.
- Trade Size: Large hedge fund or central bank trades can spark massive singular pip movements compared to regular sized retail trader activity.
- Currency Correlations: Pip movements may be linked between correlated pairs like EUR/USD and USD/CHF.
- Technical Levels: Major technical points like historical support/resistance often act as barriers where pip movements halt or rebound sharply.
Analyzing factors like these can help traders judge potential pip action during the week and best times to trade.
Pips and Stop Losses
Stop losses play a key risk management role in forex trading. Traders use them to control potential losses on a trade if the market moves against the position.
Stop losses are placed at a certain number of pips away from the trade entry point. When that level is hit, the trade is automatically closed to prevent further losses.
For example, if a trader takes a long EUR/USD position at 1.12345 with a 100 pip stop loss, the trade would close if the price drops to 1.12245. This locks in a maximum loss of $10 per micro lot.
Choosing smart stop loss pip distances is crucial for trading. Too tight increases chances of getting stopped out on market noise. Too wide leaves you exposed to greater losses.
A general rule of thumb is to place stops beyond near-term support/resistance levels, typically 50 to 100+ pips from entry depending on volatility and trend.
How Pips are Used for Take Profit Levels
Along with stop losses, prudent traders utilize take profit orders to lock in gains when a trade moves favorably.
Take profits are placed at a certain pip level beyond the entry point. If the market reaches the take profit, the trade closes automatically at the target profit goal.
For example, buying EUR/USD at 1.12345 with a take profit set at +100 pips would lead to an exit at 1.12445 to capture $10 on a micro lot.
Take profit pip distances depend on technical signals, trade style, and market conditions. Swing traders may use 100+ pip targets, while scalpers could close at 5-10 pips.
Using strategic stop loss and take profit pip levels is key for maximizing reward relative to risk in trading.
Pip Counting Strategies
Some traders utilize a pip counting approach to quantify gains/losses for a trading system or session:
- Daily Piper: Records total pips captured each day, aiming to hit a profit target like 80 pips by session end.
- Pip Challenges: Trade contests to see who can gain the highest pip count in a period, using a demo account.
- Pip Goal Trading: Closing all trades after reaching a preset pip target, like 500 pips for the week.
- Pip Skew Analysis: Tracking pip profits versus pip losses to evaluate if a strategy or pair has edge.
- Percentage Pips: Judging pip gains as a percentage of the day’s pip range. Attaining over 50% indicates an effective system.
Pip counting quantifies both progress and performance. Some traders translate pip totals into dollar amounts using position sizes for more tangible daily/weekly gain goals.
Average Pip Movement for Major Currency Pairs
Knowing the average daily pip range for different pairs allows traders to gauge volatility and set realistic profit targets. Here are estimates during normal market conditions:
- EUR/USD: 70 to 100 pips
- GBP/USD: 100 to 150 pips
- USD/JPY: 70 to 100 pips
- USD/CAD: 50 to 80 pips
- USD/CHF: 45 to 80 pips
- AUD/USD: 60 to 100 pips
- NZD/USD: 50 to 80 pips
These are not fixed, as pip movement varies across different daily sessions and news events. But it provides a rough benchmark for short term ranges.
Pairs like GBP/JPY, EUR/JPY, and AUD/JPY see wider average movements between 100-200 pips due to higher volatility.
Reading and Analyzing Pip Charts
When viewing forex charts, traders can use pip measurements to analyze:
- Candle Movements: Measure daily candle ranges in pips to check volatility. Also view wick/tail size to judge intraday rejection levels.
- Support/Resistance: Spot the distinct support and resistance levels where reversals have occurred by looking for concentrated pip movements.
- Trend Strength: In a trend, see the pip-by-pip progression over weeks and months. Strong uptrends often move in 50+ pip surges within the daily range.
- Reversal Patterns: Certain chart patterns like double tops signal pending reversals. Analyze the pip characteristics through the formation.
- Momentum Divergence: If price is making higher highs but an oscillator like MACD is showing lower highs, it indicates bearish divergence. Quantify the divergences in pips.
Pip metrics provide more precise analytical insights from price charts across all time frames.
Impact of High versus Low Pip Movement
Higher pip movement presents two-sided implications for traders:
Advantages:
- Bigger profit potential in both directions
- Wider stops possible to withstand volatility
- More room for take profits to run
Disadvantages:
- Increased risk if positioned wrong before news events
- Larger stops required which lowers position size
- Chance of getting stopped out falsely is higher
In slower pip environments:
Advantages:
- Moves are more predictable and easier to manage
- Lower risk of sharp reversals or large losses
Disadvantages:
- Profits will be smaller on average
- Harder to benefit from large directional trends
- False breakout signals are more common
Adjusting position sizing and targets based on current and average pip movement is crucial.
Common Pip Terms
Here are some other common pip terms traders should know:
- Pip Spread: Difference in pips between the bid and ask price. Wider spreads make trading more expensive.
- Pipette: Fraction of a pip when quoting past the fourth decimal. Only used for certain exotic currency pairs.
- Pipcrawler: Slow paced price movement of just a few pips at a time in a tight range.
- Pip Squawk: Announcement of major news events and their immediate pip impact.
- Pip Hammer: A steep vertical spike in pips after high volatility news. Can be either up or down.
- Pip Hunting: Aggressively closing trades at just a few pips profit, often prematurely.
Frequently Asked Questions About Pips
What are some tips for effectively using pips in forex trading?
Some best practices include:
- Use fixed, consistent stop loss and take profit pip levels per trading strategy. Avoid randomness.
- Size positions appropriately to the expected daily pip movement. Don’t use excessive leverage.
- Note daily pip ranges to gauge volatility and potential opportunity. Wider ranges signal breakout potential.
- Analyze past charts in pips to identify levels and patterns. Mark key support/resistance pip levels.
- Be aware of upcoming news events that may cause spikes in pip movement. Manage risk accordingly around these periods.
How do pips relate to the spread in forex trading?
The spread is the difference between the bid and ask price, quoted in pips. A 3 pip EUR/USD spread at 1.12345/1.12348 means buyers enter at the higher price and sellers at the lower price. In effect, traders must overcome the spread before making gains. Wider spreads require more favorable pip movement to profit.
Is it better to have high or low pip movement when trading forex?
It depends on strategy and trader skillset. Lower pip movement reduces unpredictability but also profit potential. High pip environments require tighter risk management but allow bigger gains if traded properly. Ideal conditions would be moderately high movement (60-100 pips) with low spreads during liquid sessions.
How can I use pips to judge if my trading strategy is working?
Track total daily, weekly, and monthly pip gains versus losses in a trading journal. Tally pip hit rates on technical signals. Evaluate average pip loss versus average pip gain per trade. Consistent net pip profits over many trades signals an edge. If losses in pips exceed gains, reevaluate strategy.
What role do pips play in forex algorithmic trading?
Automated trading systems rely on quantifiable metrics like pips across technical indicators, probability, and historical backtesting. Profitable algorithms use fixed pip-based criteria for entry, exit, stop loss, and take profit positioning that is optimized over long term data. Coding logic revolves around pip movements rather than just price levels.
Conclusion
Pips represent the core unit of measure in the forex market. Long-term success depends on understanding concepts like pip values, stop loss distances, daily ranges, and behavior during volatility, which new traders frequently overlook. Consistently profiting in pips is the name of the game.
This guide covers everything needed to fully utilize pips in trading, from basic calculations to advanced analytical applications. The next step is applying these lessons by tracking pips in a practice trading journal. Soon reading the market in pips will become second nature. Whether hunting pips short term or accumulating them through scalping and swing trading, they are the key to profits.
“If you don't find a way to make money while you sleep, you will work until you die.”
- Warren Buffett
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