Forex Pips – the smallest possible change
Forex Trading Pips: Unit in Forex Trading
What are pips?
A pip is an incremental price movement with a certain value that depends on the market. Simply put, it is a standard unit for measuring the change in value of an exchange rate.
The abbreviation Pip either originally comes from the term Percentage-In-Point or it stands for Price Interest Point. Regardless of the origin of the term, currency traders can use pips to discuss the smallest changes in exchange rates in easy-to-understand terms.
What are Pips in Trading
Originally, a pip was practically the smallest increment in which an FX price would move, although this original definition no longer applies to the advent of more precise pricing methods. Traditionally, FX prices have been quoted on a certain number of decimal places, most often to four decimal places. Originally, a pip here was a one-point movement on the specified last decimal place.
However, many brokers now enter Forex prices with an additional decimal place. This in turn means that a pip is often no longer the last decimal place within a citation. However, the pip remains a standardized value for all brokers and platforms. It allows professional traders to communicate clearly with the same terms.
How much is a pip worth?
For most currency pairs, a pip is a movement on the fourth decimal place. For example, if the EUR/USD rate moves from 1.1050 to 1.1051, this increase in value of .0001 USD is a pip. The most notable exceptions are the FX pairs in which the Japanese yen is involved. For pairs in which the JPY is involved, a pip is a movement on the second decimal place. Because each currency has its own relative value, the value of a pip must be calculated for that particular currency pair.
Special features of the Pip
For 5-digit brokers, also known as brokers with broken prices, the last decimal point is 0.00001 or 0.001 for yen-based currencies, representing a fraction of a pip. Due to the additional digit, it is more difficult in this case to determine an exact pip spread or pip profit without the help of a calculator. However, this disadvantage of 5-digit brokers is outweighed by the greater advantage of typically better spreads, i.e. lower transaction costs, compared to their 4-digit broker counterparts.
If you’re interested in trading stocks, you may be wondering if there’s a pip in stock trading as well. No pips are used when trading shares, as there are already other terms such as “pence” and “cents” for notifying price changes.