A pip is the smallest whole unit of measurement for a price change in a currency pair, most often equal to 0.0001. For currency pairs with the Japanese Yen, a pip is typically 0.01.
Pips are used to calculate profits and losses, set stop-loss orders, and measure the spread between a currency pair’s bid and ask price.
How pips work:
- For most currency pairs: A pip is the fourth decimal place.
- Example: If EUR/USD moves from 1.15001 to 1.1501, that’s a 1 pip increase.
- For currency pairs with the Japanese Yen: A pip is the second decimal place.
- Example: If USD/JPY moves from 109.245 to 109.255, that’s a 1 pip increase.
- Pipettes: Some platforms show a fifth decimal place, which is a fraction of a pip, or a “pipette”.
Why pips are important?
- Standard unit:
- Pips provide a standard way for traders to measure price changes and discuss their trades.
- Profit and loss calculation:
- They are fundamental for calculating how much profit or loss a trade has made. The value of a pip changes based on the lot size (e.g., standard, mini, micro) and the currency pair being traded.
- Risk management:
- Pips are used to set stop-loss and take-profit levels to manage risk.