Loading the player...
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.

[Pips are the most fundamental unit of measure used when trading currencies, but you need to know much more to become a success forex day trader. Investopedia's Become a Day Trader Course provides an in-depth look at the skills that you need to succeed as a day trader with over five hours of on-demand video.]

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 value of one pip and why are they different between currency pairs?

    In forex markets, currency trading is done on some of the world's most powerful currencies. The major currencies traded are ... Read Answer >>
  2. How is the value of a pip determined?

    Learn how the pip is used in the pricing of a currency pair in forex trading, and see how the foreign exchange market is ... Read Answer >>
  3. Why is currency always quoted in pairs?

    When reading currency quotes, you have probably noticed that there is only a single quote for a pair of currencies. Currency ... Read Answer >>
  4. Why isn't the EUR/USD currency pair quoted as USD/EUR?

    In a currency pair, the first currency in the pair is called the base currency and the second is called the quote currency. ... Read Answer >>
  5. How do I implement a forex strategy when spotting a Spinning Top Pattern?

    Learn a simple forex breakout trading strategy that can be implemented when a trader identifies a spinning top candlestick ... Read Answer >>
Related Articles
  1. Trading

    How To Use FX Options In Forex Trading

    Currency options are another versatile tool for forex traders. Find out how to use them.
  2. Tech

    The Basics Of Currency Trading

    Trading in the currency market isn't easy. We tell you what you need to know before starting.
  3. Trading

    Top 5 Questions About Currency Trading Answered

    To trade currency successfully, it helps to know the answers to these basic questions.
  4. Trading

    Forex Minis Shrink Risk Exposure

    Trading less than a standard lot means getting in for less - and having less to lose.
  5. Trading

    How Leverage Is Used In Forex Trading

    Forex trading by retail investors has grown by leaps and bounds in recent years, thanks to the proliferation of online trading platforms and the availability of cheap credit. The use of leverage ...
  6. Trading

    Top 10 Forex Trading Rules

    Get some guidelines on how to survive - and thrive - in a variety of markets.
  7. Trading

    Forex: The Moving Average MACD Combo

    Learn a strategy with clear entry and exit levels that will get you into a trend at the right time.
  8. Trading

    How To Use A European Open Forex Strategy

    Forex traders need to be aware of both price movements and the time of day. Learn FX strategies that incorporate these factors to maximize profits.
  9. Trading

    Top 8 Most Tradable Currencies

    Currencies can provide diversification for a portfolio that's in a rut. Find out which ones you need to know.
RELATED TERMS
  1. Performance Index Paper - PIP

    Short-term paper on which the rate of interest is denominated ...
  2. Quote Currency

    The quote currency is the second currency in both a direct and ...
  3. Base Currency

    The first currency quoted in a currency pair on forex. It is ...
  4. Standard Lot

    A standard lot is the equivalent to 100,000 units of the base ...
  5. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
  6. Cross Rate

    The currency exchange rate between two currencies, both of which ...
Hot Definitions
  1. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  2. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  3. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  4. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  5. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
  6. Dilution

    A reduction in the ownership percentage of a share of stock caused by the issuance of new stock. Dilution can also occur ...
Trading Center