DEFINITION of Pip
A pip is a measurement of movement in forex trading, used to define the change in value between two currencies. The term ‘”pips” is an acronym for “percentage in point.”
WHAT IT IS IN ESSENCE
Although it sometimes also referred to price interest point. Pips represent the smallest standardized movement that a currency pair can make.
This is typically equal to 1 basis point, but not always.
Traders use pips to calculate the spread between the bid and ask prices of the currency pair. And to express the profit or loss that their position has made.
Most major currencies are quoted to four decimal places. Hence, the smallest change is the equivalent of 0.0001 or the fourth digit after the decimal point.
But there are some exceptions, such as the Japanese yen. That is only quoted to two decimal places.
In these cases, the pip is the second digit after the decimal point.
Although most forex pairs will be quoted to two or four decimal places. There are some forex brokers that display an additional decimal, known as a pipette or micro pip.
HOW TO USE
Traders often use pips to reference gains or losses. A pip measures the amount of change in the exchange rate for a currency pair and is calculated using the last decimal point.
Since most major currency pairs are priced to 4 decimal places, the smallest change is that of the last decimal point. This is equivalent to 1/100 of 1%, or one basis point.
For a trader to say “I made 40 pips on the trade” for instance, means that the trader profited by 40 pips. The actual cash amount this represents depends on the pip value.
And a few words about pipettes.
A fractional pip is equivalent to 1/10 of a pip, making it possible to view the EUR/USD currency pair with pipettes to five decimal places.
While currency pairs are with the yen are the quote currency to three decimal places. Pipettes are displayed in the superscript format in the quote panel.