What is a PIP in Forex?
A PIP is a unit of measurement to communicate the change in value between two currencies. For example, a rise of .0001 US dollar versus the Euro would be a rise of one pip. In the same way that an apple seed is the smallest recognizable part of an apple, the pip is the smallest unit of price change between two currencies. The us of the word PIP is another way to explain a change in percentage points. In the foreign exchange market, all the major currency pairs are divisible to the fourth decimal place.
What is a “Pipette”
There are some circumstances where forex brokers will divide a currency unit even further to the fifth decimal place. The unit of measurement for a currency divided to the fifth decimal place is called a pipette. The purpose of dividing currency to such small units is a means of providing greater accuracy when measuring gains and losses. If you held a position in a currency of $10,000 USD and the currency price gained one pip against the Euro, you would calculate your profit by multiplying $10,00 by .0001 which would equal to a $1 profit. Therefore, one pip of a $10,000 position is equal to $1. It also means that every time the USD moves up by 1 pip you would be making a $1. profit for your position. Likewise, if the currency were to drop 1 pip in value, you would be losing $1.
Pips can add up to Massive Sums of Money
However, simple and seemingly insignificant these pip values may appear, pip values can add massive sums of money when multiplied in the forex market, where trillions of dollars are exchanged on a global basis. The pip measurement plays an important role in the forex market.