Pip

A Pip, an acronym for either Percentage in Point or Price Interest Point, is the smallest standardized unit of measurement for a change in value between two currencies. Think of it as the “cent” of the foreign exchange market (or Forex). For most major currency pairs, like the EUR/USD or GBP/USD, a pip is a move in the fourth decimal place (0.0001). So, if the price of the EUR/USD pair moves from 1.0850 to 1.0851, it has moved up by a single pip. This tiny increment is the fundamental unit for calculating profits and losses in Forex trading. While a single pip represents a minuscule amount, its financial impact becomes significant when multiplied by the large trade sizes common in currency markets. Understanding pips is essential for anyone engaging with Forex, as it forms the basis of nearly all trading calculations, from setting profit targets to managing risk.

At its core, a pip is all about standardizing the way we talk about currency movements. Instead of saying “the Euro went up by zero-point-zero-zero-zero-one dollars,” traders simply say it went up by “one pip.” It’s a universal language for the Forex world. Let's look at a classic example: the EUR/USD pair.

• If the exchange rate is 1.1200.
• The last digit, the '0' in the fourth decimal place, is the pip.
• If the rate moves to 1.1205, it has increased by 5 pips.
• If the rate falls to 1.1190, it has decreased by 10 pips.

In recent years, many brokers have started offering even greater precision by quoting prices to a fifth decimal place. This tiny fraction of a pip is often called a “pipette” or a “fractional pip,” but the standard pip (the fourth decimal place) remains the key reference point for most traders and calculations.

A single pip might seem insignificant, but its actual monetary value is what truly matters to an investor or trader. This value is not fixed; it depends on two key factors: the currency pair being traded and the size of the trade.

The size of a currency trade is measured in lots. While there are mini and micro lots, the standard lot size is 100,000 units of the base currency (the first currency in a pair). The formula for a pip's value is surprisingly simple for pairs where the US dollar is the second currency (the quote currency), like EUR/USD or GBP/USD: Pip Value = 0.0001 x Lot Size

• For a standard lot (100,000 units): 0.0001 x 100,000 = $10 per pip.

This means for every one-pip move in your favor on a standard lot of EUR/USD, you make $10. For every pip against you, you lose $10. This is how small price movements can translate into substantial profits or losses, especially when leverage is used to control large positions with a small amount of capital. This same logic applies to other financial instruments like CFDs that track currency prices.

There's one notable character who plays by different rules: the Japanese Yen (JPY). Due to the yen's much lower value relative to other major currencies, pips for JPY pairs are measured at the second decimal place (0.01).

• For the USD/JPY pair, if the rate moves from 148.50 to 148.51, that is a one-pip move.
• If it moves from 148.50 to 149.00, that is a 50-pip move.

Calculating the pip value for JPY pairs is slightly different, as the value is in JPY and must be converted back to your account's currency.

For short-term Forex traders and speculators, life revolves around pips. Their goal is to profit from small, rapid price fluctuations, often measured in minutes or hours. The spread (the difference between the buy and sell price) is measured in pips, and entire trading strategies are built around capturing a certain number of pips per day. However, a value investing practitioner sees the world very differently. Value investors are not “pip-counters.” Their investment horizon is measured in years, not minutes. When a value investor analyzes a foreign company, they are certainly concerned with the exchange rate, but on a macro level. They might ask:

• “Is the Brazilian Real fundamentally undervalued, making Brazilian stocks a bargain for a dollar-based investor?”
• “Will the long-term strengthening of the Swiss Franc provide a tailwind for my investment in this Swiss manufacturing company?”

These are questions of long-term intrinsic value, not short-term speculation. A value investor is focused on buying great businesses at fair prices and letting that value compound over time. The daily noise of pip movements is largely irrelevant to this strategy. In short, while understanding the concept of a pip is useful for financial literacy, it represents a trading-focused mindset. For the value investor, it's a reminder of the speculative frenzy they are choosing to sidestep in favor of a more patient, business-focused approach to building wealth.