Percentage in point
The major currencies (except the Japanese yen) are traditionally priced to four decimal places, and a pip is one unit of the fourth decimal point: for dollar currencies this is to 1/100th of a cent. For the yen, a pip is one unit of the second decimal point, because the yen is much closer in value to one hundredth of other major currencies.
A pip is sometimes confused with the smallest unit of change in a quote, tick size. Currency pairs are often quoted to four decimal places, but the tick size in a given market may be, for example, 5 pips or 1/2 pip.
A rate change of one pip may be related to the value change of a position in a currency market. Currency is typically traded in lot size of 100,000units of the base currency. A trading position of one lot that experiences a rate change of 1 pip therefore changes in value by 10 units of the quoted currency.
In this example, if a trader buys 5 standard lots (i.e. 5 x 100,000 = 500,000) of EUR/USD, paying USD 650,000 and closes the position after the 10 pips' appreciation, the trader will receive USD 650,500 with a profit of USD 500 (i.e. 500,000 (5 standard lots) x 0.0010 = USD 500). Most retail trading by speculators is conducted in margin accounts, requiring only a small percentage (typically 1%) of the purchase price as equity for the transaction.
Electronic trading platforms have brought greater price transparency and price competition to the foreign exchange markets. Several trading platforms have extended the quote precision for most of the major currency pairs by an additional decimal point; the rates are displayed in 1/10 pip.
- Archer, Michael D.; Bickford, James L. (May 25, 2005). Getting Started in Currency Trading: Winning in Today's Hottest Marketplace. Hoboken, New Jersey: John Wiley & Sons. ISBN 978-0-471-71303-6.
- "Forex Trading - An Explanation of Pips and Fractional Pips". InformedTrades.com. 2008-04-16. Retrieved 2009-07-13.[unreliable source?]