If you've spent five minutes on a trading platform, you've seen the word pip. It's thrown around so casually that most guides skip what it actually means — and the moment you need to size a position or read a broker's contract specifications, that gap becomes a problem.
This article explains what a pip is, how it relates to points, and why the distinction matters when you're calculating risk.
The short answer
A pip ("percentage in point") is the fourth decimal place of most currency pairs. When EUR/USD moves from 1.0850 to 1.0851, that's one pip of movement. For pairs quoted against the Japanese yen, the pip is the second decimal instead — USD/JPY moving from 148.25 to 148.26 is also one pip.
A point is usually smaller than a pip. On a 5-decimal broker (most MT5 brokers), the fifth decimal is one point — which is one tenth of a pip. So when you see a spread quoted as "8 points", that's 0.8 pips.
That's the whole concept. The rest of this article is about the practical consequences.
Why pips were defined this way
The convention predates electronic trading. Interbank dealers in the 70s and 80s needed a common unit small enough to quote spreads without using decimals in conversation. "The bid is 1.0850, offer 1.0853, spread three pips" is faster to say than "spread of 0.0003."
When retail platforms added a fifth decimal to show fractional pips — the 2010s shift from "4-digit" to "5-digit" brokers — the industry needed a name for that extra digit. They called it a point, and kept the pip where it was.
The annoying consequence: if you read older trading literature, "point" and "pip" are often used interchangeably. If you read newer broker specifications, they are not.
Pip value — what actually matters
The price movement is trivial. What traders actually need to calculate is pip value: how much money one pip of movement is worth on a specific position.
The formula for pairs where USD is the quote currency (EUR/USD, GBP/USD, AUD/USD):
Pip value (in USD) = Lot size × 0.0001
For one standard lot (100,000 units) of EUR/USD:
100,000 × 0.0001 = $10 per pip
Which means a 30-pip stop-loss on one standard lot is 30 × $10 = $300 of risk. This is the math that governs every position-sizing decision you'll ever make.
For JPY pairs, the formula uses the second decimal instead:
Pip value (in quote currency) = Lot size × 0.01
One standard lot of USD/JPY → 100,000 × 0.01 = 1,000 JPY per pip. Convert to your account currency at the current rate to get the dollar or euro equivalent.
For pairs where USD is the base currency (USD/CHF, USD/CAD), the pip value is denominated in the quote currency and fluctuates with the exchange rate. Most platforms show this automatically in the order ticket — you don't need to do the division in your head.
What this looks like on your broker
Open any order ticket in MT5. The fields you'll see related to pips:
- Price — the current bid/ask, usually shown with 5 decimals for FX (4 pips + 1 point) or 3 for JPY pairs (2 pips + 1 point).
- Volume — how many lots. 1.00 = one standard lot, 0.10 = one mini lot, 0.01 = one micro lot.
- Stop Loss / Take Profit — entered as absolute prices, not as pip distances. You compute the pip distance yourself.
- Spread — usually shown in points on MT5, so "18" means 1.8 pips.
This last one trips up almost every new trader. If your broker advertises "spreads from 0.0 pips" and you see "10" in the spread column, that's 1.0 pip — not 10 pips. Read the platform settings to confirm whether it's showing points or pips.
The "pipette" confusion
You will sometimes hear pipette used instead of point. It means the same thing: one tenth of a pip, the fifth decimal on a 5-digit broker.
Different platforms use different terminology:
| Platform / Broker | What they call the 5th decimal |
|---|---|
| MT5 (most brokers) | point |
| MT4 | point or pipette |
| cTrader | pip (fractional pip) |
| TradingView | fractional pip |
When in doubt, look at the broker's contract specification sheet — every regulated broker publishes one. It will explicitly state the tick size in price units.
Why the distinction matters for your P/L
Consider a concrete case. You open 0.10 lots of EUR/USD and set a 15-pip stop-loss. You want to know your worst-case loss.
Pip value for 0.10 lots: 10,000 × 0.0001 = $1 per pip.
Worst case: 15 pips × $1 = $15.
Now consider the same position expressed in points. 15 pips is 150 points. If your broker software happens to display your stop as "150" and you misread it as 150 pips, you'd calculate 150 × $1 = $150 of risk — ten times the real number. This sounds like a silly mistake, and yet it's among the most common reasons why beginners size positions wrong in both directions.
A mental shortcut worth having
Most traders end up with a rough table in their head:
- Standard lot (1.0) on EUR/USD ≈ $10 per pip
- Mini lot (0.1) on EUR/USD ≈ $1 per pip
- Micro lot (0.01) on EUR/USD ≈ $0.10 per pip
These are close enough for mental math on major USD-quoted pairs. For exact numbers, especially on exotic pairs or JPY crosses, use a position sizing calculator — and verify against your broker's order ticket.
What to do with this
Three concrete takeaways for your trading setup:
- Check which unit your platform displays. Before you size any live position, confirm whether the "spread" column shows points or pips. A wrong assumption here cascades into every subsequent calculation.
- Always size in pips, never in points. When you say "my stop is 20 pips away", your risk math works. When you say "my stop is 20 points", you have to remember whether you meant pips or the tenth-of-pip.
- Know your pip value per lot for your main pairs. For most traders, this means memorizing the three numbers above for EUR/USD and whichever one or two other pairs you trade.
The pip is not glamorous. It's the inch-and-foot vocabulary of trading — boring but indispensable. Once the distinction between pip and point is automatic for you, every other conversation about spreads, stops, and sizing becomes easier.
Related reading
- Lot Sizes Explained: Standard, Mini, Micro — what a "lot" actually represents
- What Is Spread in Forex? — why brokers quote spreads in points
- What Is Position Sizing in Trading? — the next step after understanding pips