Forex Explained / Forex Foundations

Connect a small exchange rate movement with the actual number of currency units at risk.

A pip measures a price change

A pip is a conventional unit used to describe an exchange rate movement. For many pairs quoted like EUR/USD, one pip is 0.0001. For many yen pairs quoted like USD/JPY, one pip is 0.01. A platform may display an additional decimal that represents a fraction of a pip.

The convention is not a substitute for the product specification. Futures use defined tick sizes and contract multipliers. A pip in a spot quote and a tick in a futures contract should not be treated as automatically equivalent.

Units determine the money involved

For a position of 10,000 euros in EUR/USD, a movement of 0.0001 dollars per euro corresponds to one dollar. The calculation is 10,000 multiplied by 0.0001. A move of ten pips therefore changes the position value by ten dollars before costs.

Buying 10,000 euros at 1.1000 and selling them at 1.1030 produces a hypothetical gross gain of 30 dollars. A fall to 1.0970 produces a gross loss of 30 dollars. The same price move on 100,000 euros would create ten times the result.

Do not assume every lot is identical

A standard retail forex lot often refers to 100,000 units of the base currency, a mini lot to 10,000 and a micro lot to 1,000. Providers and products can differ. Writing the actual base currency units beside the lot label avoids ambiguity.

A listed futures contract has its own fixed size. A cash conversion has an actual currency amount. A CFD has terms set out in its contract specification. Compare exposure in currency units or notional value before comparing labels.

Convert the result into the account currency

For 10,000 dollars in USD/JPY, a one pip movement of 0.01 yen per dollar corresponds to 100 yen. If an account reports in dollars, convert the yen result using the applicable conversion rate. At a hypothetical 150 yen per dollar, 100 yen is about 0.67 dollars.

Pip value can therefore change as exchange rates change. Fees, spreads, financing and conversion charges also affect the final account result. A correct gross price calculation is useful, but it is not a complete profit statement.

Check your understanding

A 20,000 euro position moves adversely by 25 pips in EUR/USD. What is the gross loss in dollars before costs?

See the answer

One pip is 20,000 multiplied by 0.0001, or two dollars. Twenty five pips therefore correspond to a gross loss of 50 dollars.

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For education and research. Examples are hypothetical unless identified otherwise. This lesson does not provide personalised investment advice.