Everything You Need to Know About the Pip in Trading

• Understand the basic definition of a pip and why it is an essential unit of measurement in trading.
• Learn how different instruments have a unique pip value 
• Discover how knowing the pip and pip values helps traders track profits/losses and manage risk effectively.

What is a Pip in Trading?

A pip is the smallest price movement in a trading instrument. On the MT5 platform, each instrument has its pip size. Let’s take a look at some examples:

Currencies:

When trading with the Forex Market, usually the pip represents the 4th number after the decimal place. For example, EURUSD = 1.16735, the digit 3 represents the pip. If the price moved from 1.16735 to 1.16745, it would increase by 1 pip. However, there is an exception when dealing with currencies involving the Japanese Yen. In this case, the pip will be the 2nd number after the decimal place. For example, USDJPY = 109.245, the digit 4 represents the pip, so if the price were to move from 109.245 to 109.255, the price would increase by 1 pip.

Gold:

When trading gold (XAUUSD) in the commodities market, the pip is typically the 1st number after the decimal place. For example, XAUUSD = 1950.100, the digit 1 represents the pip. If the price were to move from 1950.100 to 1950.200, it would increase by 1 pip. 

Silver:

When trading silver (XAGUSD) in the commodities market, the pip is usually the 2nd number after the decimal place. For example, XAGUSD = 27.3120, the digit 1 represents the pip. If the price changes from 27.3120 to 27.3220, it would increase by 1 pip.

Oil:

While trading U.S. Crude Oil (WTI) in the commodities market, the pip is usually the 2nd number after the decimal place. For example, WTI = 81.340, the digit 4 represents the pip. If the price changes from 81.340 to 81.350, it would increase by 1 pip.

U.S. Major Indices:

When trading U.S. major indices such as the Dow Jones (US30), Nasdaq (US100), and S&P500 (US500), the pip is typically the first number before the decimal place. For example, US30 = 35365.46, the digit 5 represents the pip. If the price moves from 35365.46 to 35366.46, it will increase by 1 pip. Moreover, if the US100 index changes from 18100.25 to 18101.25, it would increase by 1 pip. Lastly, if the US500 index moves from 

What is the Pip Value?

The pip value represents how much a single pip movement is worth in monetary terms. In simple terms, if an instrument moves by 1 pip, the pip value tells you how much that movement is worth. As we mentioned above, each instrument has its pip size, and this goes the same for the pip value (Figure 1).

Table 1: Pip Value

Profit & Loss: How to calculate Pip Value

Scenario 1

Buying 1 standard lot of EURUSD at 1.16735. If the price moved from 1.16735 to 1.16885, this means that it increased by 15 pips (Calculated by taking the New Price – Execution Price). To calculate the profit, we multiply 15 by 10 since we entered 1 standard lot, its pip value is $10 (Table 1), so we get a profit of $150.

Scenario 2

Buying 1 standard lot of EURUSD at 1.16735. If the price moved from 1.16735 to 1.16585, this means that it decreased by 15 pips (Calculated by taking the New Price – Execution Price). To calculate the loss, we multiply 15 by 10 since we entered 1 standard lot, its pip value is $10 (Table1), so we get a loss of $150.

Conclusion

Understanding pips and their value is crucial for traders as it allows them to calculate potential profits and losses. This knowledge is essential for effective risk management, helping traders make informed decisions and optimize their trading strategies.