Pip Definition

A pip, or, to give its full name, percentage in point, is the smallest change in price the exchange rate of a currency pairing can make in Forex. Most major currencies are generally priced to 4 decimal points, with a pip representing a single unit of that fourth point. For example, in dollars a pip denotes 1/100th of a cent. For currencies quoted in relation to the Japanese Yen, the exchange rate will instead quote just two decimal places. This means the value of a pip is 1 cent, not 1/100th.

Because trading technologies such as high frequency trading have meant that trades happen very quickly in Forex, the standardised pip currency is necessary to reduce the risk of making large losses. If pips were worth much more, there would be far more market volatility happening at very rapid speeds, making it difficult to monitor the direction of the market, and easy to make quick losses.