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Pips, pipettes and the spread

Lesson 7 · about 9 min

FX prices move in tiny fractions. The pip is the unit that makes those fractions countable, and once you can count pips you can price every cost and every trade the same way regardless of the pair.

What a pip is

A pip ("percentage in point" or "price interest point") is the smallest conventional unit of price change for a pair.

  • For most pairs it is 0.0001, the fourth decimal place. EUR/USD from 1.0850 to 1.0851 is one pip.
  • For pairs where the quote currency is Japanese yen it is 0.01, the second decimal place. USD/JPY from 150.20 to 150.21 is one pip.
Pair Pip size Price move Pips
EUR/USD 0.0001 1.0850 → 1.0895 45
GBP/USD 0.0001 1.2700 → 1.2620 −80
USD/JPY 0.01 150.20 → 150.95 75
EUR/JPY 0.01 162.97 → 161.47 −150
USD/CHF 0.0001 0.8800 → 0.8812 12

The rule: pips = price difference ÷ pip size. For EUR/USD, (1.0895 − 1.0850) ÷ 0.0001 = 45.

Yen pairs trip people up because the price looks bigger. USD/JPY moving from 150.20 to 151.20 is 100 pips, the same as EUR/USD moving from 1.0850 to 1.0950. Both are "one big figure" moves.

Pipettes and five-decimal quoting

Most brokers now quote one extra decimal: EUR/USD as 1.08503, USD/JPY as 150.203. That fifth (or third, for yen) digit is a pipette, a tenth of a pip, sometimes called a point or a fractional pip.

Ten pipettes make one pip. Some platforms report spreads and profits in pipettes, which makes a 0.8-pip spread show as "8" and a 30-pip loss show as "300." Always check which unit the platform is using before you size anything. A trader who thought their stop was 30 pips when it was 30 pipettes (3 pips) has sized the position ten times too large.

Spread in pips

The spread is the ask minus the bid, expressed in pips:

EUR/USD bid 1.08500, ask 1.08508: spread = 0.00008 ÷ 0.0001 = 0.8 pips.

USD/JPY bid 150.200, ask 150.212: spread = 0.012 ÷ 0.01 = 1.2 pips.

You pay the spread on every round trip. If you buy EUR/USD and it does not move, closing the trade costs 0.8 pips. The trade needs to move at least 0.8 pips in your favour just to get back to zero.

To see how much that matters, compare the spread with the size of the move you are trying to catch:

Target move Spread 0.8 pips Spread 2 pips Spread 20 pips
10 pips 8% of target 20% 200%
30 pips 2.7% 6.7% 67%
100 pips 0.8% 2% 20%

A scalper aiming for 10 pips at a 2-pip spread hands 20% of every winner to the broker before anything else. A swing trader aiming for 100 pips at the same spread pays 2%. The spread has not changed; the strategy decides how much it hurts.

Key idea: Express every cost in pips and compare it to the size of the move you expect. The same spread is trivial for one strategy and fatal for another.

Percentage terms

Pips are convenient, but it helps to know what they are in percentage terms so you can compare FX with other markets. One pip on EUR/USD at 1.0850 is 0.0001 ÷ 1.0850 = 0.0092%, a little under one hundredth of a percent. A 100-pip move is about 0.92%.

That is the scale of the market. A "huge" day in EUR/USD is 1.5%. A dull day in a large-cap stock is 1.5%. This is why leverage exists in FX at all, and why it is dangerous: to make a 1% move matter, people use 30:1 and turn it into 30% of their margin.

Where the numbers come from on a platform

Every platform shows some version of this:

  • Bid / Ask in five decimals.
  • Spread in pips or pipettes, live.
  • Points in the order ticket for stop and target distance, often in pipettes.

Before trading anywhere, put a demo order in with a stop "50" away and check what price the stop actually lands at. If it is 5 pips from entry, the ticket is in pipettes.

Try it: Take three live quotes from your platform right now, one for a four-decimal pair, one for a yen pair, and one cross. For each, write down the bid, the ask, the spread in pipettes and the spread in pips. Then compute the spread as a percentage of the price. Repeat during a quiet hour and a busy hour; the difference is the liquidity cycle Module 3 describes.

Recap

  • A pip is 0.0001 for most pairs and 0.01 for yen-quoted pairs; pips = price change ÷ pip size.
  • A pipette is a tenth of a pip; check whether your platform reports in pips or pipettes before sizing.
  • Spread in pips = (ask − bid) ÷ pip size, paid on every round trip.
  • Compare the spread with your target move; the same spread is a small cost for a swing trader and a large one for a scalper.
  • One pip on a 1.0850 pair is about 0.009%; leverage is how tiny moves are made to matter, in both directions.

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Bid-ask spread in an order bookSell orders stacked above buy orders with a gap between the best of each.SELLERS (asks)50.0690050.051,40050.0460050.011,10050.002,30049.99800spread = 0.03BUYERS (bids)
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.
Risk and reward on one tradeA price scale showing an entry with a stop two points below and a target six points above, so the reward band is three times the risk band.PRICETARGET 106.00ENTRY 100.00STOP 98.00REWARDRISK6.00 pointsthree times the risk2.00 pointsthe most you loserisk : reward = 1 : 3
Risk and reward on one trade. One trade on a price scale: the entry sits 2.00 points above the stop and 6.00 points below the target, so the shaded reward band is three times the risk band. The ratio compares what is lost if the stop is hit with what is gained if the target is reached.
Margin and leverageA small deposit controlling a much larger position, and the point at which losses trigger a margin call.Position you controlnotional value $100,000your margin deposit: $5,000$100,000 / $5,000 = 20:1 leverageYour deposit absorbs every dollar of loss$5,000$2,500$0Equity leftMARGIN CALLequity has fallen to $2,5000%1%2%2.5%3%4%5%How far the price moves against you
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.