A pip stands for "percentage in point" or "price interest point" and represents the smallest unit of measurement for price movements in forex trading.
Most currency pairs are quoted with four decimal places, with a pip representing a change in the fourth decimal place.
For currency pairs quoted with two decimal places, like the Japanese yen (JPY), a pip represents a change in the second decimal place.
The value of a pip depends on the lot size and the currency pair being traded.
For standard lot sizes (100,000 units), a pip is typically worth $10 for currency pairs where the USD is the quote currency.
To calculate the monetary value of a pip, use the formula: Value per pip = (1 pip / Exchange rate) * Lot size.
Pips are used to measure price movements, calculate profits and losses, and determine the spread (difference between bid and ask price) in forex trading.
Pips allow traders to quantify and compare price changes across different currency pairs and timeframes.
Pip values can vary based on the account denomination (e.g., if it's denominated in a currency other than the base currency of the currency pair).
Understanding pips is essential for risk management, position sizing, and determining the potential profitability of trades in forex trading.