What Is a Pip?
Pip is the name for the smallest standard increment a currency pair is quoted in, usually the fourth decimal place. It is a unit of price movement and not a unit of money, so the same number of pips is worth a completely different amount depending on the size of the position.
The pip is a convenience. It gives currency traders a whole number to talk in instead of a string of decimals. It is also the single most misleading unit in retail trading, because it describes movement while sounding like it describes money.
How it works
A pip is a fixed decimal place, not a fixed value. For most currency pairs it is the fourth decimal — a move from 1.1050 to 1.1051 is one pip. For pairs quoted to two decimals it is the second. Many brokers now quote an extra digit, the fractional pip, which is a tenth of one.
The cash value comes from the position, not from the pip. One pip on a micro position is a few pennies. The identical pip on a standard position is a hundred times that. The price moved exactly the same distance in both cases.
So “I made forty pips” is a statement about the chart, not about the account. It is closer to saying “the market moved forty units” than to reporting a result, and it is routinely used as though it were the second thing.
Why the unit persists
Because it makes different account sizes comparable in conversation — and that is exactly the problem. Stripping out position size makes two very different trades look alike, which is useful for describing a setup and actively misleading for judging performance.
A pip count contains no information about risk. It does not say how much was at stake, how close the stop was, or how much of the account a losing version would have cost. All of the things that decide whether trading is survivable are the things the unit removes.
This is why results should be stated in R or in percent of account. Both of those carry the size information the pip deliberately discards, and both make two traders’ records genuinely comparable.
Every market has its own version of this unit. Futures quote in ticks, indices in points, bonds in basis points, shares in cents. All of them are increments of price rather than amounts of money, and all of them carry the same trap: the unit is constant and its cash value is set by the size you hold.
The tell is whether the number changes when you change position size. A pip does not. A percentage of account does. Anything in the first category is describing the market, and anything in the second is describing your result — and only one of those is a performance figure.
A worked example
Take the shared series on this site. The median bar range is 0.493 and a round trip costs 0.0098, so the cost of trading is about 2% of a typical bar.
Read that in pip terms and the picture is clearer. If a typical bar is worth roughly 50 pips, the round trip is about 1 pip. A strategy targeting 5 pips is handing over a fifth of its target before the market does anything. A strategy targeting 100 pips gives up 1%.
Identical spread, identical market, two completely different businesses. The first one needs to be right far more often than the second to end up in the same place, and that requirement came from the cost rather than from anything about the method.
And the spread is quoted in pips too, which is where the unit does earn its place — comparing a 1.2-pip spread with a 0.8-pip spread is a genuinely useful comparison, because position size is held constant on both sides of it.
The original data
A round trip on this site’s shared series costs 0.0098 against a median bar range of 0.493 — about 2% of a typical bar, and about 1.6% of the median ATR14 of 0.5994.
The ratio is the point, not the absolute number. Whatever instrument you trade and whatever it calls its smallest increment, the question is the same: what fraction of your target is the cost, and how many times a day are you paying it.
Volatility decides how many pips a bar contains, so a pip target that is ambitious in a quiet week is unremarkable in a loud one. The unit is fixed and what it represents is not, which is a second way the same number means different things at different times.
And a gap crosses pips without any of them trading. A stop placed twenty pips away can be filled sixty pips away, because the intervening prices never existed.
When it fails
The characteristic failure is setting a daily pip target. The reasoning sounds disciplined — a fixed goal, measurable, repeatable — and it quietly instructs the trader to take whatever risk is necessary to reach a number that has no relationship to risk. On a quiet day the only way to hit it is to increase size or hold longer than the setup justifies. The target is met, the account is more exposed than it has ever been, and the record shows the same figure as the day before.
A second failure is comparing your results to somebody else’s pip count. Without position size, the comparison is meaningless in both directions.
A third is judging a broker on spread in pips alone while ignoring commission, which puts part of the same cost somewhere the pip figure cannot see.
A fourth is assuming fractional pips are noise. At high frequency they are a real share of the cost, which is why brokers quote them.
And a fifth is reporting performance in pips at all. It is the unit that makes a reckless month and a careful one look identical, and if a record cannot distinguish those two it is not a record of anything useful.
Related
Spread covers the cost quoted in this unit and paid at both ends. Volatility covers how many of them a bar contains and why that changes. And forex covers the market the unit belongs to.
Counting pips is the most common way I see people describe their trading, and it hides the only thing that matters. Two traders can both make fifty pips in a week and one of them risked ten times what the other did. The pip count is identical and the accounts are not remotely comparable.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.