Trading Forex: What’s a Pip?

There are a number of different pieces of terminology used in Forex Trading but interestingly there are far fewer than in other forms of trading. When you are trading stocks, there are a number of very specific pieces of terminology that you need to know and to complicate matters those pieces of terminology actually get more complicated as you go from specific stock to other specific stock. The truth is the same for other kinds of trading whether you are dealing with bonds, futures or any other type of trading that goes on a daily basis. By comparison, Forex is quite simple to understand and in order to understand Forex, one of the first things you need to do is to understand the term pip. The rest of this article is dedicated to the pip term as it is used in Forex.

What’s a Pip?

A pip is essentially a fourth decimal number (or whatever the smallest decimal place happens to be in your specific trading package) that defines how much one currency is worth in comparison to another. The interesting thing to keep in mind about pips is that they are not pieces of information in an absolute sense; what pips do is measure the movement that a currency pair takes over a specific period of time. In other words, if a currency pair started the day off at 1.0000 and ended the day at 1.0010 then there would be a pip movement of ten pips in the positive direction. Pip is not really a technical term or a highly mathematical term, but rather just a term that refers to the movement of the currency pair itself. Despite not being overly technical, it is still an important one to learn because following pip movements is the basis of Forex trading.

Pips and Money

One other thing to keep in mind about Pips is that they follow a very specific conversion into actual money. Pip distances, pip spreads and pip movement are all important because ultimately they relate to the amount of money you make on a successful trade and the amount of money you lose on an unsuccessful trade. To that end, it is important to understand the conversion rates between pips and money. The mathematical formula for figuring that out is rather intensive, but when you are trading the EUR/USD pair, it is very simple to figure this out. If you are trading on the margin for an amount equivalent to $10,000, then the pip will be equivalent to $1. If on the other hand you are trading on the margin for an amount equivalent to $100,000, then the pip will be equivalent to $10.

The pip is just one of the many definitions it is necessary to understand before you begin your Forex trading. Understanding these definitions might become a tedious task, but it will definitely help you further on down the road. These things are taught for a reason; namely because they are very important to the overall success of your Forex trading.