In foreign exchange markets (forex), a percentage in point (pip) is a unit of change in an exchange rate of a currency pair. A pip is the smallest whole unit price move that an exchange rate can make, based on forex market convention. [1]
It's important because forex trading involves tiny fluctuations in exchange rates, and Pips provides a standardized way to express these changes. By using Pip, traders can easily understand and discuss price movements, and calculate profits and losses, and manage risks more effectively. [2]
The major currencies (except the Japanese yen) are traditionally priced to four decimal places, and a pip is one unit of the fourth decimal place: for dollar currencies this is to 1⁄100 of a cent. For the yen, a pip is one unit of the second decimal place, because the yen is much closer in value to one-hundredth of other major currencies. [3]
In the forward foreign exchange market, the time value adjustment made to the spot rate is quoted in pips, or FX points or forward points. [4]
A pip is sometimes confused with the smallest unit of change in a quote, i.e. the 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.
If the currency pair of the Euro and the U.S. Dollar (EUR/USD) is trading at an exchange rate of 1.3000 (€1 = US$1.3) and the rate changes to 1.3010, the price ratio increases by 10 pips.
In this example, if a trader buys 5 standard lots (i.e. 5 × 100,000 = 500,000) of EUR/USD, paying US$650,000 and closes the position after the 10 pips' appreciation, the trader will receive US$650,500 with a profit of US$500 (i.e. 500,000 (5 standard lots) × 0.0010 = US$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. The Japanese Yen is an exception to this rule because of its worth against the US dollar being 0.01. [5]
If the NZD/USD spot is trading at 0.8325 and the NZD/USD 1-year forward contract is traded at −270 pips, the outright 1-year forward is priced at 0.8055 (= 0.8325 − 0.0270).
Electronic trading platforms have brought greater price transparency and price competition to the foreign exchange markets. [6] Several trading platforms have extended the quote precision, or "tick size", for most of the major currency pairs by an additional decimal point; the rates are displayed in 1⁄10 pip.
The table portrays pip values for selected currencies as used by Fenics MD [7] for their forward contracts or non-deliverable forwards.
| Currency | Pip value |
|---|---|
| EURUSD | US$0.0001 |
| GBPUSD | US$0.0001 |
| USDJPY | ¥0.01 |
| USDCAD | CA$0.0001 |
| AUDUSD | US$0.0001 |
| USDCHF | SFr 0.0001 |
| NZDUSD | US$0.0001 |
| USDDKK | 0.0001 kr. |
| USDSEK | 0.0001 kr |
| USDNOK | 0.0001 kr |
| USDHKD | HK$0.0001 |
| USDBRL | R$0.0001 |