A pip, or “percentage interest point” is the primary unit of measurement used in forex trading. This unit is used in relation to currency pairs and typically indicates the smallest possible change in a rate.
A pip indicates a change of 1 point in the fifth digit of an exchange rate. When applied to most currency pairs, a pip indicates a change in the fourth digit following the decimal point, or a difference of 0.0001 (0.01%).
A pip is a relative value. To determine the actual worth of a pip in a currency (the “pip value”), knowledge of three key factors is needed: the currency pair, the exchange rate and the amount being traded.
Example using the EURCHF currency pair:
Exchange rate 1: EURCHF = 1.0939.
Exchange rate 2: EURCHF = 1.0940.
The difference between the two rates, in this case, is EURCHF 0.0001, or 1 pip (0.01%).
The absolute value of a pip also depends on the amount being traded. If the trade volume exchanged at these rates was 100,000 euros, 1 pip would be 10 Swiss francs. If the amount traded were 10,000 euros, then 1 pip would equal just 1 Swiss franc.
In currency pairs which use Japanese Yen as the counter currency (like the CHFJPY pair), a pip denotes a change in the second decimal place, or 0.01.
Reason: In Yen rates, three digits appear before the decimal point. The fifth digit, in this case, is the second decimal place. Example: CHFJPY = 114.61.
In additional to pips, fractional pips are also used. A fractional pip is the tenth part of a pip.
More on this topic:
Forex pip calculator
Online trading: interactive comparison
Forex trading in Switzerland
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What is a bid-ask spread?
What is a fractional pip?
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