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. How does leverage affect pip value?

    A standard forex account has specific lots and pip units. A lot is the minimum quantity of a security that may be traded, ... Read Answer >>
  2. Where did the term 'pip' in currency exchange come from?

    Learn the definition of a pip, what it means in the scope of currency exchanges and how to determine its value. Find out ... Read Answer >>
  3. 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, ... Read Answer >>
  4. 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 >>
  5. Why is the U.S. dollar shown on the top of some currency pairs and on the bottom ...

    All currencies are traded in pairs. The first currency in the pair is called the base currency while the second is called ... Read Answer >>
Related Articles
  1. Trading

    Top 5 Questions About Currency Trading Answered

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

    Forex Minis Shrink Risk Exposure

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

    Spread-To-Pip Potential: Which Pairs Are Worth Day Trading?

    Spreads play a significant factor in profitable forex trading. Learn when it's worth trading and when it isn't.
  4. 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 ...
  5. Trading

    Top 10 Forex Trading Rules

    Get some guidelines on how to survive - and thrive - in a variety of markets.
  6. 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.
  7. 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.
  8. Investing

    Leverage's "Double-Edged Sword" Need Not Cut Deep

    Learn to cut out losses quickly, leaving profits room to grow.
  9. Trading

    Forex: Identifying Trending And Range-Bound Currencies

    Gain a trading edge by learning how macroeconomic forces play out differently for various pairs in the forex market.
RELATED TERMS
  1. Nickel

    A slang term meaning five basis points, or five pips. A nickel ...
  2. Performance Index Paper - PIP

    Short-term paper on which the rate of interest is denominated ...
  3. Currency Pair

    The quotation and pricing structure of the currencies traded ...
  4. Currency Pairs

    Two currencies with exchange rates that are traded in the retail ...
  5. Base Currency

    The first currency quoted in a currency pair on forex. It is ...
  6. Currency Pair: EUR/USD (Euro/U.S. Dollar)

    The abbreviation for the euro and U.S. dollar (EUR/USD) pair ...
Hot Definitions
  1. Trustee

    A person or firm that holds or administers property or assets for the benefit of a third party. A trustee may be appointed ...
  2. Gross Domestic Product - GDP

    GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  3. Debt/Equity Ratio

    The D/E ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity.
  4. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
  5. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  6. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
Trading Center