A pip (percentage in point) is the smallest standard unit of price movement in forex trading. For most currency pairs, a pip equals 0.0001 (the fourth decimal place). For JPY pairs, a pip equals 0.01 (the second decimal place). Pips are the universal unit used to measure price changes, calculate profits and losses, and define spread costs in forex markets.
In forex, most currency pairs are quoted to four decimal places. A move from 1.1050 to 1.1051 is a 1-pip move. The monetary value of a pip depends on the lot size and the currency pair. For a standard lot (100,000 units) of EUR/USD, one pip equals approximately $10. For a mini lot (10,000 units), one pip equals approximately $1. For a micro lot (1,000 units), one pip equals approximately $0.10. Some brokers use a fifth decimal place called a pipette (1/10th of a pip).
You buy 1 standard lot of EUR/USD at 1.1050 and it moves to 1.1085. The price moved 35 pips. At $10 per pip for a standard lot, your profit is 35 x $10 = $350. If your spread is 1.2 pips, that cost $12 on entry. Your net profit after spread is $338.
Pips are the universal language of forex trading. Understanding pip values is essential for calculating position sizes, measuring risk, determining stop loss and take profit distances, and comparing broker spreads. Without a clear understanding of pips, it is impossible to properly manage risk or evaluate trading performance in the forex market.