A pip used to be the smallest increment that a currency pair’s rate of exchange could change.
Pip stands for “Percentage In Point”.
For example, if a currency pair’s exchange rate is 1.2000 and then changes to 1.2001, we would have a change of 1 pip. A change from 1.2000 to 1.1950 would be a change of 50 pips. It can change up or down, this is not important as we can make money either way.
I say a pip USED to be the smallest change, this has changed over the last year. Several brokers are now using something called a “Fractional Pip”, this is another decimal place and is 1/10 of a pip.
Until recently, currency quotes were stated with 4 decimal places, as in 1.1234, or 0.8765.
The exception was any currency pair that contained a Japanese Yen (JPY). Because the value of the Yen was so small, these pairs (eg. GBP/JPY) were only calculated to 2 decimal places, as in 85.12.
The fractional pip has taken the 4 digit quote (4 places after the decimal) to a 5 digit quote, as in 1.12345, for the non JPY pairs. For the pairs containing JPY, the fractional pip has been added to make a 3 digit quote, as in 85.123.
Pips are what we as Forex Traders are looking to gain. Pips equate to money in the bank. The value of a pip depends on what lot size you have decided to trade, but that is a topic for another blog post.
Best regards
Russ
