Pip stands for “percentage in point” and it is the smallest possible change in the exchange rate of a currency pair. The reason we use pips in forex trading is because price fluctuations are tiny and their impact depends on the size of your position.
A pip is actually a standardised unit and it’s 0.0001 (or 0.01%) for most currency pairs. The notable exception is the Japanese yen (JPY) where a pip is equivalent to 0.01 (or 1%).
Exchange rate changes are so small that they’re calculated in pips. It’s important for you to understand how a one-pip change will affect your position because this will help you determine your next move. This is best explained in an example:
Let’s use the EUR/USD pair, which is very popular, and this quotation as a starting point: EUR/USD=1.1733
I buy 10,000 units at this price so what’s a pip worth to me?
10,000 x 0.0001 = $1
Therefore, if the market moves 1 pip in my favour I will earn $1 and if the market moves 1 pip against me I will lose $1.
Now, I hear that the quotation increased by 100 pips. This means it went from 1.1733 to 1.833 and I made a $100 profit.
Some brokers quote an even smaller unit in currency exchange prices, called pipette, which is 0.1 of a pip. This allows for greater sensitivity in your estimates.
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