What Is A Pip In Forex Trading?

What Is A Pip In Forex Trading?

Forex is the most frequently traded security on the global financial market. If you’ve ever been involved in the forex market before, or read some market news, you may have come across a term called ‘pip’. 

But what is a pip and what uses does it have in forex trading? - A pip is a unit of measurement used in forex trading that represents a 1/100th of a cent for most major currencies. However, there are some exceptions to this rule. 

Typically, an exchange rate between a pair of currencies is depicted with the smallest unit of measurement being one pip, or 1/100th of a cent. 

For example, the GBP/USD currency pair, which is one of the highest-traded pairs on the market, has an exchange rate of 1.2566, where the last number, which is 6, represents 6 pips. 

Pip Definition And Value

In forex trading, a "pip" stands for "percentage in point" or "price interest point," and it is a standardized unit of measurement used to express changes in the value between two currencies. Pips are typically used to measure the price movement of currency pairs in the foreign exchange market. 

The value of a pip is typically very small, and it varies depending on the size of your trading position and the currency pair being traded. For most currency pairs, a pip is usually the smallest price move that can be observed in the exchange rate.

While most major currency pairs have a pip value equivalent to 0.0001, pairs including the Japanese yen have a pip value of 0.01, because the yen is a lower-valued currency. 

Major currency pairs are generally characterized by very high liquidity, which means that they make small, incremental price movements of a couple of pips at a time. 

For example, suppose you’ve bought the GBP/USD pair at 1.2566 and the price reaches 1.2570. This means that the price has increased by 4 pips. 


Broker Spreads

On the modern forex markets, most brokerages compete in terms of features and low commission charges to attract as many clients as possible. 

To generate revenue, forex brokers charge spreads, which are differences between the bid and ask prices of a particular currency pair. 

Spreads are also denoted in pips and clients can easily review and compare the spreads offered by individual forex brokers to choose the most affordable option. 

The number of pips charged as spread differs between currencies. Major currency pairs, such as the GBP/USD mentioned above, typically have very tight spreads and brokers make up for this by the sheer volume of transactions done in these currency pairs, which still leads to significant revenue. 

For example, if the bid price of GBP/USD is 1.2566 and the ask price is 1.2567, the spread is 1 pip, which is what the broker gets per each transaction made on the market. While this might sound miniscule, a major currency pair such as GBP/USD, annual trading volume reaches over 250 billion. If, hypothetically, all of this trading was done through a single brokerage, with a spread of 1 pip would amount to $25 million in revenue just from a single pair of currencies. 

Key Takeaways From What Is A Pip In Forex Trading

  • In forex trading, a pip standardized unit of measurement used to express changes in the value between two currencies
  • Pips are typically denoted as 1/100th of a cent, or the equivalent of 0.0001 for most major currencies, except for the Japanese yen, which has a pip value of 0.01 
  • Forex brokers charge a spread between bid and ask prices in pips, which constitutes a bulk of the revenue generated by forex brokers from clients trading on their platforms
  • For major currencies, even a spread of a single, or couple of pips can add up to considerable annual revenue for forex brokers 

FAQs On What Is A Pip In Forex Trading

What does a pip mean in forex?

A pip is a unit of measurement that typically represents a value of 0.0001. Pips are used to measure the differences between bid and ask prices, as well as the price changes in a currency pair. 

Is 1 pip the smallest measurement in forex?

Yes. A pip is the smallest unit of measurement in forex trading and represents 1/100th of a cent. However, the value of a pip can vary from currency to currency. For example, pairs that include the Japanese yen (JPY) have a pip value of 0.01.

Do forex brokers charge commissions in pips?

Yes. The fees charged by forex brokers, especially the spread, is measured in pips. The spread is the difference between bid and ask prices. For example, if the bid price for the USD/CAD pair is 1.3656, and the ask price is 1.3658, the spread is 2 pips.