Live Currency Rates

What is a PIP?

What is a PIP?

Postby admin » Thu Oct 04, 2012 11:21 pm

In finance, a percentage in point (pip) is a unit of change in an exchange rate of a currency pair.
The major currencies, except the Japanese yen, are priced to four decimal places. For these currencies a pip is one unit of the fourth decimal point, or 1/100th of one percent. For the Japanese yen, a pip refers to one unit in the second decimal point, because the yen is much closer in value to one hundredth of other major currencies. This would be different for the other currencies.

A pip is sometimes confused with the smallest unit of change in a quote, that is, 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 100000units 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.

If the currency pair of the Euro vs. the U.S. Dollar (EUR/USD) is trading at an exchange rate of 1.3000 (1 EUR = 1.3 USD) and the rate changes to 1.3010, the price ratio increased by 10 pips.

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 and achieved a profit of 500 US dollars (i.e. 500,000 (5 standard lots) x 0.0010 = USD 500). Most retail trading by speculators is conducted in margin accounts, requiring that only a small percentage (typically 1%) of the purchase price is required as equity for this transaction.
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