Pips, as the name might suggest, are tiny units of measurement used to quantify small changes in a currency or, more accurately, a currency pair. Pip stands for point in percentage and, in most cases, is just that: the last decimal point in a currency.
PLEASE NOTE: A pip can be measured in terms of the quote or in terms of the underlying currency. What do we mean by this? Well, a pip could represent $0.0001 USD if we’re dealing in USD currency pairs or it could be $100 USD if we’re talking about a $1 million USD quote… So, quite a difference.
E.g. When trading a mini lot (10k units of currency), each pip is worth roughly one unit of the currency in which your account is denominated. If your account is denominated in USD, for example, each pip (depending on the currency pair) is worth about $1.
Obviously, this varies somewhat depending on the currency so this guide will provide detailed examples to allow you to grasp just how much (or little!) a pip really is, as well as defining and explaining other commonly used units of measurement within the world of forex trading, such as pipette, and lot.
Additionally, we’ll explain the significance of these incremental units of measurements while highlighting what it is they are used for. So, let’s begin by defining the term pip, as it applies to some of the most popular currencies/currency pairs.
A pip is a standardized unit and is equal to 1/100th of a one percentage point. So, if we use the US dollar as an example, as it is often makes up half a currency pair, one pip is $0.0001 USD. That is one pip, or one ‘basis point’. Pips or basis points are an easy way to describe commonly occurring price shifts without getting bogged down in zeros. They save time and space and allow for quick and easy discussion.
If EUR/USD moves from 1.1050 to 1.1051, that $0.0001 USD rise in value can be described as a one pip, or one basis point, increase. Or if you bought EUR/USD at 1.0000, then closed your trade in profit at a price of 1.0010, you’ve made a gain of ten pips.
A pip tends to be the last decimal place of a quotation. Most pairs go to four decimal places, but there are exceptions, such as Japanese Yen pairs which go out to two decimal places. In all pairs involving the Japanese Yen (JPY), a PIP is the 1/100th place – 2 places to the right of the decimal. In all other currency pairs, a pip is the 1/10,000th place – 4 places to the right of the decimal.
Pips aren’t always based on the underlying currency though; sometimes when mention pips, they are talking about the same equation, but applied to the quote itself, i.e.,
Basis point (BPS) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001), and is used to denote the percentage change in a financial instrument. The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and 0.01% = one basis point.