Pip is short for Price Interest Point is one of the basic terms in Forex Trading. You use it when calculating profits, checking spreads and slippage.
A pip is commonly described as the smallest step the price of a currency pair could move.
As a rule of thumb, a pip is the 4th decimal place (0.0001) for most forex pairs, with exception of the Japanese yen (JPY) pairs, where one pip is the 2nd decimal place (0.01)
The electronic trading platforms introduced additional “accuracy” of the quotes by adding a “fractional” pip, or the so called “pipettes” – 5th decimal place (0.00001) for most forex pairs and 3rd decimal place (0.001) for Japanese yen pair. So 1 pip consists of 10 “pipettes”. This way calculations are more precise, because you can have 1.2, 2.3 or 4.8 pips instead of rounding to 1, 2 or 5 pips.
Why is it important to understand what is a pip?
It is important to understand the concept of pips when trading Forex pairs. The reason is that all the profit calculations are based on the price changing in pips.
How to calculate the value of a pip and convert profits from price change to money?
Lets take the following example. You see on a chart that the price of EUR/USD moved from 1.1030 to 1.1052. After reading so far you now know what is a pip, so you determine that this is a move of 22 pips. That is great! However what does it mean in terms of money? What do 22 pips represent?
Since we are looking at a quote of EUR/USD, the 22 pips represent 0.0022 US Dollars. This means you gained or lost 0.0022 US dollars for each 1 EUR of position you have open (depending on if you are on the Buy or on the Sell side).
So if you have a long position of 100 000 EUR/USD, this means you gained:
100 000 x 0.0022 = 220 US Dollars.