The term pip stands for point in percentage and is the measurement of the smallest price move that a currency can make. Take your time to understand this term in detail as it is especially important for forex traders. A pip measures the fluctuation in the exchange rate between the bid and ask prices for a currency pair and is calculated using the last decimal point.
The spread in forex trading is quoted in pips and is a measure of the price movement in the foreign exchange market. The value of a pip depends on three things: what currency pair is being traded, the exchange rate, and the trade size. Most pairs are shown with 5 decimal places, but there are some exceptions like Japanese yen pairs that are shown with 3 decimal places. For example, for GBP/USD, it is 0.00001, and for USD/JPY, it is 0.001.
Example of a pip
Let us say we have a USD/CHF quote of 0.7747. What this means is that for USD 1, you can buy 0.7747 CHF. Assuming there was a rise in the value of one-pip, this quote would increase to 0.7748. The value of the dollar would rise relative to the Swiss franc because $ 1 would allow you to buy slightly more CHF.
Key takeaways:
- A pip references a one-pip move in a forex trade.
- Traders often refer to pips to highlight profit/loss.
- Most major currency pairs are priced to five decimal places, a pip is usually equal to the fourth figure after the decimal point.