====== Pips ======
A pip, which stands for either "Percentage In Point" or "Price Interest Point," is the smallest standardized price move that a given [[exchange rate]] can make. Think of it as the 'cent' of the [[foreign exchange market]] (Forex). For most major [[currency pair]]s, like the popular [[EUR/USD]], a pip is a move in the fourth decimal place (0.0001). So, if the exchange rate for EUR/USD shifts from 1.1050 to 1.1051, it has moved up by a single pip. This tiny increment is the fundamental building block for calculating profits and losses in [[Forex trading]]. The main exception to this rule involves pairs with the Japanese Yen (JPY), such as the [[USD/JPY]]. For these pairs, a pip is represented by the second decimal place (0.01). While pips are the lifeblood of short-term traders, their significance fades when viewed through the long-term lens of [[value investing]].
===== Why Do Pips Matter? =====
For anyone trading currencies, pips are everything. They are the universal unit for measuring how much an exchange rate has moved and, consequently, how much profit or loss has been made on a trade. Instead of saying, "The Euro went up by 0.0050 dollars," a trader will simply say, "The Euro is up 50 pips." This standardization makes communication quick, clear, and universal across the global Forex market.
==== Calculating Profit and Loss ====
The monetary value of a pip isn't fixed; it depends on the currency pair you are trading and the size of your position. The position size is measured in '[[lot size|lots]]'.
  * **Standard Lot:** 100,000 units of the base currency.
  * **Mini Lot:** 10,000 units.
  * **Micro Lot:** 1,000 units.
Let's walk through a simple example. Imagine you believe the Euro will strengthen against the US Dollar.
  - You buy one **standard lot** (100,000 units) of EUR/USD at a price of 1.1050.
  - The market moves in your favor, and the price rises to 1.1080.
  - The difference is 1.1080 - 1.1050 = 0.0030, or a **30-pip** gain.
To find the profit, you calculate the value of one pip for your trade size and multiply it by the number of pips gained. For a standard lot of EUR/USD, one pip is almost always worth $10.
  - **Profit Calculation:** 30 pips x $10 per pip = $300 profit.
This direct relationship between pips and profit/loss is why traders are so obsessed with tracking these tiny movements.
==== Pips vs. Pipettes (Fractional Pips) ====
In your trading adventures, you may notice that many brokers quote prices with an extra decimal place—for instance, showing the EUR/USD at 1.10505 instead of 1.1050. That tiny fifth digit is known as a '[[pipette]]', or a fractional pip.
A pipette is simply one-tenth of a pip. This innovation allows for more precise pricing and can lead to a tighter [[bid-ask spread]], which is the difference between the buying and selling price. While it adds a layer of precision, the concept remains the same: the fourth decimal place (for most pairs) is still the king pip.
===== Pips and Value Investing =====
Now for the Capipedia perspective. How should a value investor think about pips? The simple answer is: //not very much//.
Pips are the currency of short-term speculators and those who practice [[technical analysis]]. These traders attempt to profit from small, rapid price fluctuations, often holding positions for mere minutes or hours. Their world revolves around predicting the next 10, 20, or 50 pips of movement.
A value investor operates on a completely different timeline and with a different philosophy. When considering a foreign investment, a value investor is concerned with fundamental, long-term economic drivers:
  * **Economic Health:** Is the country's economy growing? Is its government stable?
  * **Interest Rates:** How do the central bank's policies affect the currency's long-term value?
  * **Intrinsic Value:** Is the currency fundamentally undervalued based on metrics like [[purchasing power parity]]?
A value investor doesn't try to "scalp" a few pips from the market. They might buy shares in a German company because it is selling for less than its [[intrinsic value]], and they will need to convert their dollars to euros to do so. In this context, understanding pips can be useful for getting a good //execution price// on that currency conversion. However, the investment decision itself is based on a multi-year outlook on the company's value, not on a multi-minute prediction of the EUR/USD exchange rate.
In short, while a Forex trader asks, "Where will the next 20 pips go?", a value investor asks, "Is this foreign asset fundamentally cheap for the next 5-10 years?" It's a critical distinction between short-term speculation and long-term investment.