If you have read anything about forex trading recently, you have almost certainly seen references to the forex pip. For those of us who are not familiar with the intricacies of the forex market, it can be a very confusing item. Therefore, we are going to take a look at exactly what a forex pip is and how it is used when calculating profit and loss from forex trades.
Pip stands for price interest point. It is the smallest value of pairs of currencies. The prices on the forex exchange, which stands for foreign currency exchange, are for pairs of currencies. The first currency in a pair is the base currency and the second is the counter currency. To make it simple, the base currency in each pair has a value of 1. The other currency will have a value of 1.xx times this amount. If you look at any given pair of currencies, the price will have five numbers in it. The very last number after the decimal point is the pip.
The movements of currency pair prices are measured in pips, rather than dollars and cents because the U.S. dollar is one of the currencies that is traded in most pairs. When you make a trade on a currency pair, you are actually buying the base currency and selling the counter currency at the same time, hence the exchange. By measuring movements in pips, it is easier to see whether a position is winning or losing based on very minute fluctuations in price that limit the risk exposure one has with any open position.
For example, let say GBP/USD 1.9920. 10 minutes later, GBP/USD 1.9930. This means that GBP moves 10 pips up against USD. Most forex traders set up there orders based on the market moving a certain number of pips before they close out of a position and either take their profit or cut their losses.
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