Pip

A pip — short for “percentage in point” — is the smallest measurable unit of change in a currency pair. For most pairs, one pip is 0.0001; for pairs involving the Japanese yen, one pip is 0.01. A move from EUR/USD 1.0850 to 1.0851 is one pip. Pips are the universal language of foreign-exchange traders; every spread, every gain, every loss is measured in pips.

The four-decimal convention

The standard pip is the fourth decimal place in a currency quote. EUR/USD = 1.0850 means one euro equals 1.0850 dollars. EUR/USD = 1.0851 is one pip higher. EUR/USD = 1.0855 is five pips higher. This convention applies to most major and minor pairs.

The Japanese yen is the exception because the yen’s absolute value is much smaller than other major currencies. USD/JPY is quoted to the second decimal: 150.50, 150.51, etc. One pip is 0.01 yen, not 0.0001. GBP/JPY, EUR/JPY, and all yen pairs follow this rule.

This difference exists because if yen pairs used the four-decimal convention, quotes would look like 15050.00, and traders would have to count extra decimal places constantly. The market chose simplicity: count in two decimal places for yen.

Spreads and profits measured in pips

Spreads are always quoted in pips. A bank offering EUR/USD at a 1-pip spread means the bid is 1.0850 and the ask is 1.0851. A retail broker advertising a 2-pip spread on the same pair means bid 1.0849, ask 1.0851 — twice as expensive.

When you close a trade, your profit or loss is measured in pips and then converted to dollars. If you buy EUR/USD at 1.0850 and sell at 1.0855, you have made 5 pips per euro. On a standard lot of 100,000 euros, that is 100,000 × 0.0001 = $500. On a mini lot of 10,000 euros, it is $50. On a micro lot of 1,000 euros, it is $5. This is why lot sizes and leverage are always discussed together in retail forex — a few pips of profit or loss, multiplied by leverage, can be life-changing or account-wiping.

Fractional pips and precision

Modern electronic trading displays quotes to five decimals (fractional pips or “pipettes”). EUR/USD might be quoted as 1.08503. The last digit (3) is 0.3 pipettes, or 3/10 of a pip. This allows for tighter spreads and more efficient pricing in liquid markets like EUR/USD.

For yen pairs, the precision is three decimals: USD/JPY = 150.503. The third decimal is a fractional pip.

Fractional pips matter for institutional traders executing huge volume; for a retail trader, a few fractional pips are negligible compared to the broker’s spread.

Why pips, not basis points?

In the bond market, movements are quoted in basis points: 1 basis point = 0.01% of yield. A bond yielding 3.50% that moves to 3.55% has moved 5 basis points.

In FX, the convention is pips. A currency pair does not have a “yield” in the same way; it is a pure exchange rate. The pip convention reflects this difference and makes mental math easy: 50 pips on a standard lot = $500, always (for non-yen pairs). It is a feature of the market’s history and culture, not necessity.

Pips and leverage

Retail forex leverage exists because individual pips are so small. On a 1:1 unlevered basis, a 50-pip move in EUR/USD on a standard lot ($500) is meaningful but not life-changing. On 50:1 leverage, the same 50-pip move becomes $25,000 — enough to wipe out a $500 account.

This is the source of both the appeal and the danger of retail forex: the margin requirement is tiny relative to the notional exposure, so a tiny move in pips creates outsized gains or losses.

See also