PIP stands for Percentage In Point.
A pip is the smallest unit of measurement of the change in exchange rate for a given currency pair. It is the smallest price change that a given exchange rate can make. Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point – for most pairs this is the equivalent of 1/100th of one percent, or one basis point.
For example, the smallest move the USD/CAD currency pair can make is $0.0001, or one basis point. The smallest move in a currency does not always need to be equal to one basis point, but this is generally the case with most currency pairs. What does all this mean?
In forex, currency prices are typically quoted to the fourth decimal. For example, if the EUR/USD pair moves from 1.5510 to 1.5520 it has moved by 10 pips. If the EUR/USD increases by 1 full cent in value (from 1.5510 to 1.5610), it has increased by 100 pips.
The actual pip value will be different for each pair, and also different based on the exchange rate at any given time. To calculate the pip value, use the following equation:
pip value = 1 pip / exchange rate.
Lets see two examples:
EUR/USD 1.5535
pip value = 0.0001 / 1.5535 = 0.00006437
USD/JPY 107.95
pip value = 0.01 / 107.95 = 0.00009263
Okay, so now you know if you buy 1 “share” of EUR/USD and it goes up by 1 pip you will make a profit of $0.00006437. Not enough to buy a new car, but that is where lot sizes come in.
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