As I continue to write content pertaining to currency trading, fundamental economic developments and monetary policy actions taken by central banks, I find myself mentioning a term that I have yet to explain. That term is ‘pip’ and it’s an abbreviation that is thrown around all the time in the currency trading world. But what is a pip? What does it stand for and why is it important? On this page, I will attempt to answer all those questions. So clear your mind and be prepared to learn one of the most fundamental lessons in currency trading.
What is a Price Interest Point?
A price interest point, also known as a pip, is the smallest recognized price movement or price change in a currency pair trading on the Foreign Exchange Market. A pip is the most basic unit of measurement in Forex trading. Usually, a pip is measured four places after the decimal point (0.0001 = pip measure starts here). This applies to currency pairs like the eur/usd, gbp/usd, aud/usd, usd/chf and usd/cad. With some currency pairs, a pip is measured two places after the decimal point (0.01 = pip measurement starts here). This applies to currency pairs that include the Japanese yen like the usd/jpy, eur/jpy and gbp/jpy.
Here’s an example. Let’s say the European euro, United States dollar currency pair (ISO currency code eur/usd) is trading at $1.3850 at 2:00 PM GMT (Greenwich Mean Time). Two minutes later at 2:02 PM GMT, the currency pair is trading at $1.3851. That would be a change of one price interest point, or pip. In this example, the euro increased in value relative to the United States dollar by one pip.
Here’s another example. Let’s say the United States dollar, Japanese yen currency pair (ISO code usd/jpy) is trading at $105.88 at 8:00 PM GMT. One minute later at 8:01 PM GMT, the currency pair is trading at $105.58. This this case, that would be a change of thirty price interest points, or pips. The United States dollar decreased in value relative to the Japanese yen by thirty pips in this example.
One hundred pips equate to one basis point, also known as a bip. If the United States dollar, Swiss franc currency pair (ISO code usd/chf) is trading at $1.1587 at 9:55 AM GMT, and two hours later at 11:55 AM GMT the currency pair is trading at $1.1787, that would be a price change of two hundred pips or two basis points. The United States dollar appreciated in value by two basis points or two hundred price interest points relative to the Swiss franc in this example.
If you are a currency trader, pips are very important for they are the determining factor in whether one profits or not. If a currency trader enters a trade and acquires price interest points, that trader will profit. If a currency trader loses price interest points, that trader will take on loses. Just how much a currency trader will gain or lose per pip would depend on the size of the trader’s position.
Let’s say that currency trader John thinks that the European euro is going to appreciate in value relative to the United States dollar in the near future. So he buys the euro and sells the dollar at the trading price $1.2850. If the euro dollar trading price increases to $1.3000, then John would have gained one hundred and fifty pips (1.5 bips) and thus made a profit. However, if the price were to fall $1.2700 then John would have lost 150 pips and thus incurred a loss.
Pips are fundamental in currency trading. I hope that this article has helped you get a better understanding of what a pip is and why it is important.