Pip

In forex markets, a pip is a percentage in point or price interest point (pip), reflecting a unit of change in an exchange rate.

Major currency pairs are traditionally priced to four decimal places – a pip is one unit of the fourth decimal point, or 1/100 of a cent.

The exception in this case is the Japanese yen, in which a pip is one unit of the second decimal point.

Pips adhere to a rate of change that may be related to a value change in a position of specific currency rates.

Forex is traded often in a lot size of 100,000 units of a base currency.

In this instance, a trading position of one lot experiencing a change of 1 pip would see a change in value by 10 units of currency.

Understanding Pips in Forex Trading

Pips can best be understood using an example of two currencies.

For example, if the NZD/USD is trading at an exchange rate of 0.6800 and the rate changes to 0.6810, then the price ratio increases by 10 pips.

By extending this example, if a forex trader buys 5 lots (i.e. 5 × 100,000 = 500,000) of NZD/USD, paying $650,000 and closes the position after the 10 pips' appreciation, the trader will receive $650,500 with a profit of $500 (i.e. 500,000 (5 standard lots) × 0.0010 = $500).

Pips are highly relevant to forex traders given the use of leverage and trading that takes place in margin accounts, which require very small percentages of the actual purchase price as equity for a given transaction.

Some retail brokers will quote currency pairs beyond the standard 4th or 2nd decimal place, instead to the 5th or 3rd decimal place. These are quoting fractional pips, known as pipettes.