A forex pip is the smallest unit of price movement in the exchange rate of a currency pair. Pip is an extremely important concept in the foreign exchange trading. Forex trading revolves around pips. Pip stands for Percentage in Points or some refer to it as Price interest point.
Earned pips are the reward for a good trade. Traders trade foreign exchange in order to make as many pips as they can. And lost pips are the punishment for a bad trade. Pip is almost similar to the tick found in other financial markets like the futures market.
Every currencys price is always expressed relative to another currency. There is no absolute currency price for US Dollar. However, you can express US Dollar price relative to Euros, British pounds, Yen, Swiss Franc and so on. It is the same with every other currency pair. Most of the currency pair exchange rates are expressed up to four decimal places. Forex pip refers to one point change in the fourth decimal place of the most major currency. Why most? Because there is a currency that is expressed up to two decimal places relative to the other currencies. Yes, Japanese Yen!
The convention is to express for most of the currency pairs the exchange rate like x.xxxx where a change of 0.0001 would constitute one pip. A pip would be the equivalent of 1/100th of one percent or one basis point. You must be familiar with the concept of basis points used in calculating the interest rate changes. You must have often heard that the FED or for that matter any other central bank has increased or decreased the interest rate by 15 basis points. Pip is almost similar to a basis point.
The exchange rate format would look like xxx.xx where a change of 000.01 would constitute one pip, for the handful of currency pairs featuring the Japanese Yen like GBP/JPY or USD/JPY.
Calculating the exact value of each pip for the currency pair and lot size traded is the job of the brokers trading platform which should include a pip calculator created especially for this purpose.
Here is a simple calculation: Pip= (Lot Size) (No of Lots) (Pip Size). It is better that you also know how the exact value of a pip for a currency pair is calculated. The result of this equation will be denominated in the quote currency.
Quote currency is the second currency in the pair. The second currency in the pair is also known as the counter currency. The first currency in the pair is known as the quoted currency. However, the most popular name for the first currency in any currency pair is the base currency. So in the currency pair, EUR/USD, EUR is the base or quoted currency. USD is the quote or counter currency.
No conversion is needed for the US Dollar denominated trading accounts if the quote currency is already in US Dollar. For example for the currency pairs, EUR/USD, GBP/USD, CHF/USD, JPY/USD, no conversion is needed.
It helps to keep in mind that all currency pairs with the quote currency as US Dollar (ending in the US Dollar) will be $10/pip for a standard lot, $1/pip for a mini lot and $0.1 for a micro lot. This includes heavily traded pairs like EUR/USD, GBP/USD and AUD/USD.
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