Forex currency trading, just like all the financial and even scientific subjects has a specific terminology and if someone is willing to learn forex he or she needs to be familiar with it. Knowing the terms will help you learning the trading properly, and applying it successfully in practice. By doing so, you will eventually stumble across the term “Forex PIP”. The abbreviation stands for Percentage In Point, or Price Interest Point. The profits and losses in forex trading are measured in pips, so it is very important to know what the forex pip really is.

Forex PIP is the smallest price unit of a currency, or otherwise said – the smallest value of a Forex quote. The PIP helps to define the rise all fall of a forex value and it is used as an alternative way of measurement in dollars and cents for example. In pips are also measured the forex spreads. Spread is the difference between the sell and the buy quotes. To try to clarify it a bit further, let us have a look at the next example: when EUR/USD quote reads 1.3200/3, which means that the spread is 3 pips, which in other words is the difference between the values of 1.3200 and 1.3203.

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Why measure in pips? Simply because a universal currency does not exist. Even though the dollar is the most frequently used currency in the trading, it is not involved in all of the trades. This is why even the dollar cannot be used as such a universal currency, and the pip is introduced for unification of the forex trading values. And this is why traders are using the forex pip, which is a percentage of the rate of the currencies involved in the forex currency trade.

All of the major currencies in the forex trade market are quoted to the fourth decimal, with the only exception being the Japanese yen. Let us have a look at some examples. The bid price for the pair EUR/USD is quoted at 1.2345 and the ask price is at 1.2348, giving you the spread of 0.0003, or in other words – 3pips. Talking about percentage, 1 pip is 0.01% of the whole lot. This means that if the amount is $10,000, then 1pip will be worth $1. This is valid only in case USD is the quote currency. If the quote currency is different, 1pip is 10 units of the currency when the lot size is 100,000 units.

The Japanese yen is an exception of the rule, because of its low unit value. This is why the yen is quoted to the second decimal point. If USD/JPY forex rate is 110.18, one pip is 0.01 or 1% in yen. The pip value will be 1000JPY, which will be worth $11.015. This is a bit difficult to comprehend, especially for beginners, but a thing to remember is: for EUR/USD 1pip = 0.0001, for USD/JPY 1pip = 0.01.

It is always advisable that at the beginning you trade in one only forex pair, preferably in EUR/USD. When doing so, after a while you will get a clear idea of how much is a pip in terms of actual gains and losses. After a period, you will know how much one pip is worth in dollars just by taking a quick look at the forex account.

If you are trading in a number of different currency pairs, which means that you are dealing with pips of different value. This may not only confuse you, but is most likely that you will end up losing money. Therefore its highly recommended that you to stick to the EURO/USD currency pair until you build up better understanding of forex pip values and trends even if you are using a forex software.