What is a pip and what does it represent?

By Matt Lee AAA
A:

A pip is a very small measure of change in a currency pair in the forex market. It can be measured in terms of the quote or in terms of the underlying currency. A pip is a standardized unit and is the smallest amount by which a currency quote can change, which is usually $0.0001 for U.S.-dollar related currency pairs, which is more commonly referred to as 1/100th of 1%, or one basis point. This standardized size helps to protect investors from huge losses. For example, if a pip was 10 basis points, a one-pip change would cause more extreme volatility in currency values.

Assume that we have a USD/EUR direct quote of 0.7747. What this quote means is that for US$1, you can buy about 0.7747 euros. If there was a one-pip increase in this quote (to 0.7748), the value of the U.S. dollar would rise relative to the euro, as US$1 would allow you to buy slightly more euros.

The effect that a one-pip change has on the dollar amount, or pip value, depends on the amount of euros purchased. If an investor buys 10,000 euros with U.S. dollars, the price paid will be US$12,908.22 ([1/0.7747] x 10,000). If the exchange rate for this pair experiences a one-pip increase, the price paid would be $12,906.56 ([1/0.7748] x 10,000). In that case, the pip value on a lot of 10,000 euros will be US$1.66 ($12,908.22 - $12,906.56). If, on the other hand, the same investor purchases 100,000 euros at the same initial price, the pip value will be US$16.6. As this example demonstrates, the pip value increases depending on the amount of the underlying currency (in this case euros) that is purchased.

For more insight, see Common Questions About Currency Trading and Wading Into The Currency Market.

RELATED FAQS

  1. What is the difference between pips, points, and ticks?

    Learn the differences between points, ticks and pips and how each are used by investors to measure price changes in stocks, ...
  2. How does the balance of payments impact currency exchange rates?

    Take a brief look at the relationship between a nation's balance of payments and the exchange rate value of its currency ...
  3. How do I use Weighted Alpha to create a forex trading strategy?

    Find out how the concept of weighted alpha can be applied to currency contracts in the foreign exchange market to spot potentially ...
  4. How does inflation affect the exchange rate between two nations?

    Understand how inflation can affect foreign exchange rates of a currency and how it is just one of many economic factors ...
RELATED TERMS
  1. ICE LIBOR

    See LIBOR
  2. WM/Reuters Benchmark Rates

    Spot and forward foreign exchange rates that are used as standard ...
  3. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
  4. Open Position Ratio

    The percentage of open positions held for major currency pairs ...
  5. Indirect Quote

    A currency quotation in the foreign exchange markets that expresses ...
  6. Competitive Devaluation

    A series of sudden currency depreciations that nations may resort ...

You May Also Like

Related Articles
  1. Economics

    Who Benefits From South Korea's Lowered ...

  2. Chart Advisor

    Trade A Surging U.S. Dollar With These ...

  3. Chart Advisor

    4 Currency ETFs On The Move

  4. Fundamental Analysis

    Forex Exotic Currency Trading: Risks ...

  5. Chart Advisor

    4 Currency ETFs To Watch Right Now

Trading Center