Table of Contents
What Is a Pip?
Let me tell you directly: a pip, or price interest point, is one-hundredth of 1%, marking the smallest price movement possible for a currency in the international forex markets.
In forex, a pip is the smallest whole unit price move an exchange rate can make, following market conventions. It's one-hundredth of 1% (1/100 × 0.01).
Most currency pairs get priced to four decimal places, so a pip sits in the fourth decimal spot, like 1/10,000th. Take USD/CAD: the smallest move is $0.0001, which is one pip.
Don't mix up pips in forex with basis points (bps) in interest rates; bps are 1/100th of 1%, or 0.01%.
Key Takeaways
Forex pairs quote current prices in pips, short for percentage in points.
Practically, a pip is one-hundredth of 1% (1/100 × 0.01), showing up as 0.0001 in the fourth decimal.
It's the tiniest price change for most pairs, and bid-ask spreads in forex quotes get measured in pips.
Understanding Pips
You need to grasp that a pip is a core idea in foreign exchange, or forex. As a trader, you buy and sell currencies valued against each other, with quotes as bid and ask spreads to four decimal places.
Exchange rate moves get measured in pips. Since most pairs quote to four decimals, the smallest whole change is one pip.
Know this: 'pip' stands for percentage in point or price interest point.
Calculating Pip Value
A pip's value varies by currency pair, exchange rate, and trade value. If your account uses U.S. dollars and USD is the quote currency, like in EUR/USD, the pip fixes at 0.0001.
Calculate it by multiplying trade value by 0.0001. For EUR/USD with 10,000 euros, that's $1 per pip. Buy at 1.0801, sell at 1.0811: 10 pips profit, or $10.
The formula is Value Traded × Quote Currency Pip = Pip Value, so 10,000 × 0.0001 = 1.
If USD is the base, like USD/CAD, factor in the exchange rate: Trade Value (Pip Size ÷ Exchange Rate) = Pip Value. For example, 100,000 (0.0001 ÷ 1.2829) ≈ 7.7948. Buy at 1.2829, sell at 1.2830: 1 pip profit, $7.79.
JPY Exception
Japanese yen pairs quote to two decimal places, an exception. For EUR/JPY or USD/JPY, pip value is 1/100 divided by the rate. If EUR/JPY is 132.62, one pip is 1/100 ÷ 132.62 = 0.0000754. With 100,000 euros, that's $7.54 in USD.
Fractional pips, or pipettes, are 1/10 of a pip, adding precision as a fifth decimal (or third for yen). Traders might call them pips, but that's confusing.
Pips and Profitability
Exchange rate moves decide your profit or loss. Buy EUR/USD and profit if euro rises vs. dollar. Buy at 1.1835, exit at 1.1901: 66 pips gain.
For USD/JPY, sell at 112.06, close at 112.09: lose 3 pips. Close at 112.01: gain 5 pips. On $10 million at 112.01 close, that's ¥500,000 profit, or $4,463.89 USD.
Real-World Examples of Pip
Hyperinflation and devaluation can make rates unmanageable, rendering pips meaningless. In Weimar Germany, the mark fell from 4.2 to 4.2 trillion per dollar by 1923.
Turkey's lira hit 1.6 million per dollar in 2001, overwhelming systems; they removed six zeros, renaming it. As of February 2024, it's about 0.032 lira per dollar.
What’s a Pip?
A pip measures the smallest whole unit difference in bid-ask spreads for forex quotes, equaling 1/100 of 1%, or 0.0001, extending quotes to four decimals. Smaller changes use fractional pips, or pipettes.
What Is the Difference Between a Pip and a Pipette?
A pip is 0.0001 (1/10,000) change, the smallest for most pairs. A pipette is 1/10 of that, at 1/100,000, measuring the fifth decimal (third for yen).
How Are Pips Used?
Pips form part of exchange rate quotes, showing position value changes. If you buy at 1.1356 and sell at 1.1360, that's 4 pips. Calculate single pip value, multiply by lot size for dollar profit.
Does the Japanese Yen Forex Rate Use Pips?
Yes, but yen quotes go to two decimals, so a pip is 0.01, not 0.0001.
What Is the Spread in Forex?
It's ask minus bid for a pair. EUR/USD ask 1.1053, bid 1.1051: 2 pips spread. Cost is spread times trade size; 100,000 units at 2 pips: $20.
The Bottom Line
Pips are fundamental in forex, basing trading decisions. They're the smallest move per market convention, helping you quantify gains, losses, leverage, and risk.
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