Pips vs Points in Prop Trading: Everything You Need to Know

What is a Pip in Forex Prop Trading?

A pip (Percentage in Point) is the standard unit of measurement for price movement in forex trading. For most currency pairs, a pip is the fourth decimal place of the exchange rate. It allows traders to accurately calculate simulated profit, loss, and risk exposure per trade.

I have been trading for over 35 years, starting my career on the floor of the London Futures Exchange. If there is one technical basic that trips up new traders entering a prop trading firm, it is a misunderstanding of pips and points.

In the world of professional trading, mixing up pips and points is a classic “rookie” mistake that can lead to disastrous position-sizing errors and blown evaluations. A pip is not a fixed dollar amount; it is a unit of measurement. Understanding how to calculate it across different asset classes is the absolute foundation of risk management.

Here is everything you need to know about calculating pips, the crucial difference between pips and points, and how to use them to protect your simulated capital.

How Do You Read Pips and Pipettes?

In forex, currency prices typically move in such tiny increments that they are quoted in pips. Most major currency pairs are priced out to four decimal places, meaning the fourth decimal place is the pip.

However, modern brokers and trading platforms also quote a fifth decimal place. This is known as a pipette or a fractional pip. A pipette is equal to 1/10th of a pip. While swing traders generally focus on whole pips, pipettes are critical for high-frequency or scalping strategies where exact precision is required.

What is the JPY Pip Exception?

The most common calculation error traders make involves the Japanese Yen. Because the value of the Yen is vastly different from the US Dollar or the Euro, JPY currency pairs are only quoted to two decimal places, not four.

When trading pairs like USD/JPY or GBP/JPY, the pip is the second decimal place, and the pipette is the third. If USD/JPY moves from 150.25 to 150.35, that is exactly a 10-pip movement.

How Do You Calculate the Value of a Pip?

The monetary value of a pip fluctuates based on the currency pair you are trading and the volume of your trade (your lot size).

If you are trading a standard lot (100,000 units of the base currency) on a pair where the US Dollar is the quote currency (like GBP/USD or EUR/USD), a one-pip movement is typically valued at exactly $10. If you are trading a mini lot (10,000 units), a one-pip movement is valued at $1.

The Universal Pip Value Formula

Pip Value = (0.0001 / Exchange Rate) x Lot Size

If the USD is not the quote currency (such as in cross-currency pairs like EUR/GBP), calculating pip value becomes more complex because you must convert the value back into your account’s base currency. Always utilize an automated pip calculator or position-sizing indicator before placing any simulated orders.

What is the Difference Between Pips and Points?

The simplest way to distinguish them is by asset class: Pips are the language of Forex, while Points are the language of Equities, Indices, and Commodities.

Main Markets & How They Move

As a prop trader, you need to know which measurement to use for each desk you trade:

• Currency Market (Forex): Measured in Pips. Key pairs include EUR/USD, GBP/USD, USD/JPY. Prop traders focus heavily on “Pip Value” to ensure they don’t violate daily drawdown limits.
• Stock Indices: Measured in Points. Key markets include the S&P 500 (SPX), Nasdaq 100 (NDX), and DAX 40. Note: These are highly volatile. A 100-point move on the Nasdaq happens much faster than a 100-pip move on EUR/USD.
• Commodities: Measured in Points and Ticks. For Gold (XAU/USD), many retail traders refer to a move from $2,300 to $2,301 as a “10-pip” move, but in professional circles, it is typically treated as a 1-point move.
• Cryptocurrencies: Measured in Whole Units (Points) or Dollars. Because Bitcoin (BTC) is worth tens of thousands of dollars, pips are irrelevant; traders simply track the dollar-value move.

How Do Prop Traders Use Pips for Risk Management?

In the retail trading world, people obsess over “how many pips they made.” In the prop trading world, professionals focus on how pips dictate their risk per trade.

When you manage a simulated funded trading account, your primary objective is survival. If you have a maximum daily simulated loss limit of 4%, you must use pip distance to determine your stop-loss placement.

For example, if your strategy requires a 20-pip stop-loss, you must calculate your lot size so that those 20 pips equal exactly 1% (or less) of your total simulated balance. By focusing on consistent pip-based risk management rather than “swinging for the fences,” you ensure that no single bad trade will jeopardize your evaluation.

Common Pip Pitfalls to Avoid

• The MetaTrader Platform Trap (Critical Warning): Many trading platforms, like MetaTrader 4 and 5, use the word “Points” in their code for everything. On MT4, a “point” is often actually a pipette. If you set a “10 point” stop loss on EUR/USD thinking it is 10 pips, you might actually be setting a 1-pip stop loss, which will get hit instantly! Always double-check your platform’s definitions.
• Ignoring the Spread: The “spread” is the difference between the buy and sell price of an asset, and it is measured in pips. If your spread is 1.5 pips, a trade must move 1.5 pips in your favor just to break even.
• Ignoring Pair Volatility: A 50-pip stop-loss on a highly volatile pair like GBP/NZD is completely different from a 50-pip stop-loss on a slow-moving pair like EUR/CHF. Always measure your pips relative to the pair’s average daily range (ADR).

Ready to put these insights into practice?

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