📚 BASIC — FOREX & COMMODITIES FOUNDATION

🧮 MODULE 3 — MARKET MECHANICS & CALCULATIONS

📏 SECTION 4 — PIP CALCULATION IN CURRENCY PAIRS

🎯 Section Objective

By the end of this section, you should be able to look at a currency pair and answer three very important questions:

How far did price move?

How much is each unit of that movement worth?

How much money did that movement create or lose for my position?

That sounds simple.

But there is an important difference between price movement and money movement.

A currency pair can move 50 pips.

That does not automatically mean you made $500.

Why?

Because the amount of money you make or lose also depends on how large your position is and, in some cases, what currency your trading account uses.

So in this section, we're going to turn something that looks like tiny decimal numbers on a screen into something much easier:

Price movement → Pips → Pip value → P&L

1. 📏 WHAT IS A PIP?

Imagine you're watching EUR/USD.

The price moves from:

1.1000 → 1.1030

Something happened.

But saying:

“EUR/USD moved from 1.1000 to 1.1030”

isn't always the easiest way to communicate the size of the movement.

Traders therefore use a common measurement called a pip.

💡 The Simple Idea

For many traditional FX quotes, a pip is the standard unit used to describe a change in price.

For most non-JPY currency pairs:

1 pip = 0.0001

So:

EUR/USD: 1.1000 → 1.1001

= 1 pip

And:

1.1000 → 1.1030

= 30 pips

That's all a pip is at its simplest:

A standardized way of measuring currency-price movement.

😂 A Funny Example

Imagine two students are racing.

One student says:

“I ran 0.0001 kilometers.”

The other says:

“Bro... just tell me how far you ran.” 😂

That's partly what pips help traders do.

Instead of constantly discussing tiny decimal changes, traders can say:

“EUR/USD moved 30 pips.”

Much easier.

🧮 Let's Put Some Numbers On It

Suppose EUR/USD moves:

1.0850 → 1.0880

Difference:

0.0030

For a typical four-decimal EUR/USD quote:

0.0030 ÷ 0.0001 = 30 pips

So the market moved:

📈 30 pips upward

Now imagine another trade where EUR/USD moves:

1.0850 → 1.0825

Difference:

0.0025

That's:

📉 25 pips downward

Notice something important:

Pips measure movement.

They do not, by themselves, tell you how much money was made or lost.

⚠️ The Beginner Trap

A beginner might think:

“30 pips = $300.”

Not necessarily.

Thirty pips is 30 pips.

The dollar result depends on the pip value of your position.

For example:

• 30 pips × $1/pip = $30

• 30 pips × $10/pip = $300

• 30 pips × $0.10/pip = $3

Same market movement.

Completely different P&L.

🧠 How a Professional Thinks

A professional separates the two questions:

Question 1: How far did price move?

→ Pips

Question 2: How much was each pip worth to my position?

→ Pip value

Then:

Pips × Pip Value = Gross price-movement P&L

That's the mental model you want to build.

2. 🔍 PIP vs POINT vs PIPETTE

Now things get slightly more interesting.

You may see your broker's price displayed like this:

EUR/USD = 1.10527

Wait...

If a traditional pip is 0.0001, what's that fifth decimal doing there?

Welcome to the world of points and pipettes.

📏 Pip

For many non-JPY FX pairs:

1 pip = 0.0001

Example:

1.1050 → 1.1051

= 1 pip

🔬 Pipette

A pipette is commonly one-tenth of a pip.

So:

1 pip = 10 pipettes

For a five-decimal EUR/USD quote:

1.10500 → 1.10501

= 1 pipette

And:

1.10500 → 1.10510

= 1 pip

💻 What About a Point?

The word point is dangerous because brokers and platforms do not always use it identically.

In many retail FX platforms, especially five-digit pricing:

1 point = 1 pipette

So:

10 points = 1 pip

But terminology can vary by platform and instrument.

⚠️ Professional rule:

Never assume what “point” means. Check the instrument's specifications and platform convention.

🧠 Think About This

Your broker displays:

EUR/USD: 1.10500

It changes to:

1.10537

How far did price move?

Difference:

0.00037

That's:

3.7 pips

or:

37 pipettes

The important thing isn't memorizing terminology.

It's being able to translate the quote into an actual price movement.

3. 🧮 CALCULATING PIP MOVEMENT

Now let's learn how to calculate it ourselves.

Suppose EUR/USD moves from:

1.0800 → 1.0835

Step 1 — Find the price difference

1.0835 − 1.0800 = 0.0035

Step 2 — Convert the difference into pips

For a typical non-JPY pair:

0.0035 ÷ 0.0001 = 35 pips

Therefore:

📈 EUR/USD moved 35 pips.

Simple.

📉 What About a Downward Move?

Suppose EUR/USD moves:

1.0835 → 1.0800

The absolute movement is still:

0.0035 = 35 pips

But the direction is different.

📈 Long position → potentially a gain from a 35-pip rise.

📉 Long position → potentially a loss from a 35-pip decline.

📉 Short position → potentially a gain from a 35-pip decline.

📈 Short position → potentially a loss from a 35-pip rise.

This is why we must always separate:

Movement

from

Position direction.

4. 💰 WHAT IS PIP VALUE?

Now we reach the part that actually connects pips to money.

💡 The Simple Idea

Pip value = how much one pip is worth for your particular position.

That's the bridge between:

📊 Price movement

and

💰 Money

Suppose your position has a pip value of:

$10 per pip

and EUR/USD moves:

30 pips in your favor.

Then, before trading costs:

30 × $10 = $300

💰 Gross price-movement P&L = $300

But if the same position moves 30 pips against you:

30 × $10 = $300

📉 Gross price-movement loss = $300

The market didn't change its rules.

Your position simply experienced the movement in the opposite direction.

🔑 The Big Idea

Pips tell you how far price moved. Pip value tells you what that movement is worth to your position.

And pip value is affected by factors such as:

• 📏 Position size

• 💱 Currency pair

• 💵 Account currency

• 📊 Exchange rates

• Broker/instrument specifications

So don't memorize:

“One pip always equals $10.”

That's only true in certain circumstances.

5. 📦 STANDARD LOT & PIP VALUE

Let's talk about position size.

A commonly used FX convention is:

1 standard lot = 100,000 units of the base currency

For example, with EUR/USD:

1 standard lot = 100,000 EUR

But here's something very important:

⚠️ A standard lot does NOT automatically mean the same dollar pip value for every currency pair and account.

For a typical EUR/USD position with a USD-denominated account, the commonly cited pip value for 1 standard lot is approximately:

$10 per pip

Let's see why.

For EUR/USD:

1 pip = 0.0001

Position size:

100,000 EUR

Therefore:

100,000 × 0.0001 = 10 USD

So approximately:

1 standard lot EUR/USD = $10 per pip

🧮 Example

You buy:

1 standard lot EUR/USD

Price moves:

+25 pips

Approximate gross price-movement P&L:

25 × $10 = $250

💰 Approximately $250

Before considering things such as spread, commission, swaps/financing, execution effects, and other applicable costs.

⚠️ Important

Do not turn:

“1 standard lot ≈ $10/pip on EUR/USD”

into:

“Every standard lot is always $10/pip.”

That would be incorrect.

6. 📦 MINI LOT & PIP VALUE

A commonly used convention is:

1 mini lot = 10,000 units

That's one-tenth of a standard lot.

If a typical EUR/USD standard lot is approximately:

$10/pip

then a mini lot is approximately:

$1/pip

because:

10,000 × 0.0001 = $1

🧮 Example

You trade:

1 mini lot EUR/USD

The market moves:

40 pips in your favor

Approximate gross price-movement P&L:

40 × $1 = $40

💰 Approximately $40

Now compare that with the standard lot.

Same market.

Same 40-pip movement.

Different position size.

PositionApprox. EUR/USD Pip Value*Standard lot — 100,000~$10/pipMini lot — 10,000~$1/pipMicro lot — 1,000~$0.10/pip

*Illustrative for a USD-denominated account and typical EUR/USD pricing; actual values can vary with exchange rates and broker specifications.

7. 🔬 MICRO LOT & PIP VALUE

A commonly used convention is:

1 micro lot = 1,000 units

For a typical EUR/USD position:

1,000 × 0.0001 = $0.10

So:

1 micro lot ≈ $0.10 per pip

😂 A Simple Way to Remember It

Think of position size like pizza.

🍕 Standard lot = whole pizza

🍕 Mini lot = 1/10 of the pizza

🍕 Micro lot = 1/100 of the pizza

If the entire pizza represents $10 per pip:

• Whole pizza → ~$10/pip

• 1/10 pizza → ~$1/pip

• 1/100 pizza → ~$0.10/pip

The market moved the same distance.

You're simply holding different amounts of the position.

🧠 Why This Matters

Suppose EUR/USD moves 50 pips.

Standard lot

50 × $10 = $500

Mini lot

50 × $1 = $50

Micro lot

50 × $0.10 = $5

Same 50-pip movement.

Different financial consequences.

That's why position size matters enormously.

8. 💴 PIP VALUE IN JPY PAIRS

Now we need to change one part of our thinking.

Pairs involving Japanese yen are commonly quoted to two decimal places rather than four.

For example:

USD/JPY = 150.25

A commonly used FX convention is:

1 pip = 0.01

So:

150.25 → 150.26

= 1 pip

And:

150.25 → 150.75

= 50 pips

🧮 Example

USD/JPY moves:

150.20 → 150.70

Difference:

0.50

Since:

1 pip = 0.01

we calculate:

0.50 ÷ 0.01 = 50 pips

📈 The pair moved 50 pips.

💰 But What Is the Dollar Value?

Here's where beginners often get surprised.

Suppose you trade:

100,000 USD/USD?

No.

That's not how the pair works.

USD/JPY means:

USD is the base currency.

JPY is the quote currency.

A standard lot conventionally represents:

100,000 USD

A 1-pip movement is:

0.01 JPY

So:

100,000 × 0.01 = 1,000 JPY

The pip value is therefore:

1,000 JPY per pip

But your account may be in USD.

So you need to convert that JPY amount into USD using the relevant exchange rate.

For example, if USD/JPY is around 150.00:

1,000 JPY ÷ 150 ≈ $6.67

So the pip value would be approximately:

$6.67 per pip

The exact amount changes as the exchange rate changes.

🔑 The Important Lesson

For JPY pairs, don't blindly memorize:

“Standard lot = $10/pip.”

Instead ask:

What is the pip size?

What is my position size?

What currency is the pip value initially expressed in?

What is my account currency?

That's professional thinking.

9. 🌍 PIP VALUE IN DIFFERENT ACCOUNT CURRENCIES

Now imagine three traders.

Trader A has a:

🇺🇸 USD account

Trader B has a:

🇨🇦 CAD account

Trader C has a:

🇬🇧 GBP account

They all trade the same EUR/USD position.

Does that mean each trader necessarily sees the exact same monetary pip value?

No.

The underlying position may generate its pip value in a particular currency, and that amount may need to be converted into the trader's account currency.

🧠 Think About This

Imagine a restaurant bill.

Your meal costs:

€100

If your wallet is in:

🇺🇸 USD → you need the EUR/USD exchange rate.

🇨🇦 CAD → you need the EUR/CAD exchange rate.

🇬🇧 GBP → you need the EUR/GBP exchange rate.

The meal didn't change.

Your conversion into your own currency changed.

The same principle applies to pip value.

🧮 General Framework

For many FX situations, you can think of the process as:

Position size × Pip size = pip value in quote currency

Then:

Pip value in quote currency → converted into account currency

The exact conversion depends on the currency pair and the relevant exchange rate.

⚠️ Beginner Trap

A trader might memorize:

“EUR/USD is $10 per pip per standard lot.”

Then they open a CAD account and continue using exactly $10.

That can produce an incorrect risk calculation.

The better approach is:

🔎 Calculate first.

Don't memorize what should be calculated.

10. 🎯 PIP CALCULATION EXERCISES

Now it's your turn.

No calculator at first.

Try to solve each one yourself.

🧠 CHALLENGE 1 — Basic Pip Movement

EUR/USD moves:

1.1000 → 1.1030

How many pips?

Pause.

Don't look ahead.

...

...

✅ Answer:

Difference:

0.0030

For a typical non-JPY pair:

0.0030 ÷ 0.0001 = 30 pips

📈 Answer: 30 pips

🧮 CHALLENGE 2 — Pip Value

You trade a typical:

1 standard lot EUR/USD

Assume:

$10 per pip

The market moves:

+30 pips

What's the approximate gross price-movement P&L?

Your turn.

30 × $10 = ?

✅ Answer:

$300

💰 Gross price-movement P&L ≈ $300

🧮 CHALLENGE 3 — Mini Lot

You trade:

1 mini lot EUR/USD

Assume:

$1 per pip

The market moves:

−40 pips

What's the approximate gross price-movement P&L?

Think.

40 × $1 = ?

📉 Answer: −$40

🧮 CHALLENGE 4 — Micro Lot

You trade:

1 micro lot EUR/USD

Assume:

$0.10 per pip

Price moves:

+75 pips

What's the approximate gross price-movement P&L?

75 × $0.10 =

💰 $7.50

🧮 CHALLENGE 5 — JPY Pair

USD/JPY moves:

150.20 → 150.70

How many pips?

Difference:

0.50

JPY pip size:

0.01

Therefore:

0.50 ÷ 0.01 = 50

📈 Answer: 50 pips

🎯 CHALLENGE 6 — The Trader's Question

Two traders experience the exact same market movement.

Both trade EUR/USD.

Both experience:

+30 pips

Trader A has a position worth approximately:

$10/pip

Trader B has a position worth approximately:

$1/pip

Who makes more from the price movement?

🧠 Think before reading further.

Trader A:

30 × $10 = $300

Trader B:

30 × $1 = $30

💰 Trader A: approximately $300

💰 Trader B: approximately $30

The market moved the same distance.

The difference came from position size and pip value.

🧩 PUTTING EVERYTHING TOGETHER

Now we can connect the entire chain.

Imagine you open a EUR/USD position.

The market moves.

First, we ask:

📊 How far did price move?

That's measured in:

Pips

Then:

💰 What is one pip worth for my position?

That's:

Pip Value

Then:

🧮 What is the approximate monetary effect?

We use:

Pip Movement × Pip Value = Gross Price-Movement P&L

And then we remember:

⚠️ Real trading P&L can also be affected by costs and execution.

These can include:

• Spread

• Commission

• Financing/swap

• Slippage

• Other broker-specific charges

So the simple calculation gives us the price-movement component, not necessarily the exact final amount appearing in the account.

⚠️ THE BIGGEST BEGINNER MISTAKE

A trader sees:

+50 pips

and thinks:

“I made $500!”

Not necessarily.

The correct question is:

“How much is each pip worth for my position?”

A 50-pip move could represent very different monetary outcomes depending on position size and account currency.

That's why experienced traders don't just think:

“How many pips can I make?”

They also think:

“How much money am I risking if those pips go against me?”

That is a much more useful question.

🧠 HOW A PROFESSIONAL THINKS

A beginner might say:

“I found a setup that could make 100 pips!”

A professional asks:

“Okay. How much would 100 pips mean for this position?”

Then:

“How many pips is my invalidation?”

Then:

“What is that loss in account currency?”

Then:

“Does that amount fit my risk rules?”

That is the transition from looking at price to managing financial exposure.

🔬 OBSERVATION vs INTERPRETATION

Let's apply one of the most important principles of this course.

Suppose you observe:

🔬 OBSERVATION

EUR/USD moved 50 pips upward.

That's measurable.

Then you say:

🧠 INTERPRETATION

“The euro must be strengthening because of today's economic data.”

That is an interpretation.

Then:

🎯 THESIS

“I expect EUR/USD to continue higher.”

That's your market expectation.

Then:

🛑 INVALIDATION

“What would make me admit that my idea is wrong?”

Perhaps price behavior, incoming information, or another piece of evidence contradicts your thesis.

Notice the difference.

50 pips upward is something you observed.

“It must continue upward” is something you inferred.

Never confuse the two.

🌍 SECTION CASE STUDY — SWISS NATIONAL BANK, JANUARY 2015

Now let's connect pip calculations with something much more serious.

On January 15, 2015, the Swiss National Bank unexpectedly removed its minimum exchange-rate policy for EUR/CHF.

The market reacted violently.

The important lesson for this section isn't simply:

“EUR/CHF moved a lot.”

The deeper lesson is what happened to the relationship between:

price movement → position size → financial outcome

🔬 What Did the Market Actually Show?

The currency market experienced an extremely rapid and disorderly move.

Liquidity became severely stressed, and prices moved dramatically.

For highly leveraged traders, a relatively small account could suddenly be exposed to losses far larger than they had psychologically expected.

🧠 What Could Traders Infer?

A trader could reasonably conclude:

Extreme market events can make normal-looking leverage and position sizes extremely dangerous.

But they should not conclude:

“A certain historical price pattern will always predict the next crisis.”

That would go beyond the evidence.

⚠️ What Could Go Wrong?

Imagine a trader who thinks:

“I'm only risking 20 pips.”

Sounds controlled.

But what happens if the market moves violently and liquidity disappears?

The actual execution price may differ substantially from the intended stop price.

That is why a stop-loss is a risk-management tool, not a magical guarantee of an exact exit price in every market condition.

👨‍🏫 INSTRUCTOR PROMPT

Ask the learner:

“Separate these three things.”

1. 🔬 What did the market actually show?

A dramatic and disorderly currency-market move.

2. 🧠 What did you infer?

That policy surprises and liquidity stress can create extreme price movements and expose leveraged positions to substantial losses.

3. 🔎 What additional evidence would you want?

Ask:

• How liquid was the market?

• What was the execution environment?

• What leverage was being used?

• Where were the actual available prices?

• What happened to spreads?

• How large was the position?

• What was the account's available equity?

This is professional analysis.

Not:

“The chart moved a lot, therefore I know exactly what happened.”

🎯 YOUR TURN — THE FINAL PIP TEST

You are looking at EUR/USD.

Your account is denominated in USD.

You trade a position where the pip value is approximately:

$2 per pip

Price moves:

+45 pips

But your trading costs associated with the position total:

$8

Question 1

What is the approximate gross price-movement P&L?

Question 2

What is the approximate result after the stated $8 cost?

Question 3

What information did you need to calculate the answer?

Question 4

If price had moved 45 pips against you instead, what would happen?

🧠 THINK BEFORE YOU ANSWER

The important chain is:

45 pips × $2/pip = $90

Then:

$90 − $8 = $82

So the approximate result is:

💰 +$82

If the movement had been against the position:

−$90 − $8 = −$98

📉 −$98

This illustrates something important:

Costs don't care whether your trade is winning or losing.

They reduce the result either way.

🔑 THE PIP FORMULA TO REMEMBER

For a simplified situation:

Pip Movement × Pip Value = Gross Price-Movement P&L

Then:

Gross P&L − Trading Costs = Approximate Net P&L

And remember:

Pip value itself may need to be calculated or converted depending on the pair, position size, account currency, and current exchange rates.

✅ SECTION TAKEAWAYS

📏 1. A pip measures price movement.

For many non-JPY FX pairs, one pip is commonly 0.0001.

For many JPY pairs, one pip is commonly 0.01.

🔬 2. A pipette is commonly one-tenth of a pip.

But platform terminology such as “point” can vary, so always check the instrument specifications.

💰 3. Pip value converts movement into money.

The value depends on factors including position size, pair, exchange rates, and account currency.

📦 4. Bigger position = bigger financial impact.

The same 50-pip market movement can produce very different P&L depending on position size.

⚠️ 5. Pips are not risk.

Saying:

“I'm risking 20 pips”

doesn't tell us how much money is actually at risk.

We need the pip value and position size.

🧠 6. Professionals calculate instead of guessing.

Don't memorize:

“One pip always equals $10.”

Ask:

“What is one pip worth for THIS position, in MY account currency?”

🧠 THE BIG IDEA

A pip tells you how far the market moved. Pip value tells you what that movement means for your money.

Once you understand that relationship, the numbers on a Forex chart stop looking like random decimals.

They start telling you a story:

📊 Price moved → 📏 Pips measured → 📏 Position size determined exposure → 💰 Pip value converted movement into money → 📉 P&L shows the financial result.

And that is the foundation we need before moving deeper into position sizing, risk, margin, leverage, and trade calculations.