Forex Pip Pip Away

I'm sure there are those of us who really ask this question.

What exactly is a PIP?
A simple answer to this is:

A pip is the smallest price increment in forex trading - pip stands for percentage in point.

Prices are quoted to the fourth decimal point in the forex market - for example EUR/USD might be bid at 1.1914 and offered at 1.1917. In this example we can see that the spread is 3 pips wide. The Japanese Yen (JPY) is an exception - it is quoted only to the second decimal point.

Another way of looking at this would be.

Using USDJPY as an example, this yields:

(.01/130.46) x USD10,000 = $0.77

or 77 cents per pip

Using EURUSD as an example, we have:

(.0001/.8942) x EUR10,000 = EUR 1.1183

But we want the pip value in USD, so we then must multiply EUR1.1183 x (EURUSD exchange rate):

EUR 1.1183 x .8942 = $1.00

This is in fact a phenomenon you will see with any currency in which the currency is quoted first (such as EURUSD, GBPUSP, or AUDUSD): the pip value is always $1.00 per 10,000 currency units. This is why pip (or "tick") values in currency futures, where the currency is quoted first, are always fixed.

Approximate pip values for the major currencies are as follows, per 10,000 units of the base currency:

USD/JPY: 1 pip = $.77; In other words a change from 130.45 to 130.46 is worth about $.77 per $10,000.

EUR/USD: 1 pip = $1.00; .8941 to .8942 is worth $1.00 per 10,000 Euros.

GBP/USD: 1 pip = $1.00; 1.4765 to 1.4766 is worth $1.00 per 10,000 Pounds.

USD/CHF: 1 pip = $.59; 1.6855 to 1.6866 is worth $.59 per $10,000.

Happy PIPing :)