A pip, or "Percentage in Point," is the smallest unit of movement in a currency pair’s exchange rate. In most currency pairs, a pip is equivalent to a 0.0001 change in the exchange rate.
For example, if the EUR/USD moves from 1.1250 to 1.1251, it has moved by one pip.
Understanding pips is essential for Forex traders because they precisely measure price changes.
The value of a pip depends on the size of the position and the currency pair being traded. In most cases, currency traders use pips to calculate their profits or losses per trade, helping them manage risk.
For instance, if you are trading one standard lot of EUR/USD (which is 100,000 units) and the price moves 100 pips, the value of that move will be $1,000, assuming the USD is the quote currency.
Pips are critical for traders to set stop-loss and take-profit levels, and they help traders gauge the size of price movements to make informed decisions. They are a fundamental concept in the Forex market, allowing for precise measurement of market fluctuations and risk management strategies.