What is a Pip in Forex trading? Definition and examples - TopAsiaFX

005, Dec 2021

This article will focus on the minimum price change known as pip. You will find out how much it is, why we measure price movements in them, and whether the pip is the same for all trading instruments. What can I say – there are pips and then there are other pips, and it’s important to understand the pip's meaning.

Pip trading depends on many things, and a trader has to know what position size, basis point, and pip move mean. Let’s try to find out!

Pips Definition & Meaning

I will not torment the reader with a long introduction. A pip is a general term for the minimum unit of price change. The term is most popular among Forex traders because it’s inconvenient to calculate minuscule fluctuations of currencies in dollars or euros. It's easier to say that the price grew by 540 pips than 0.0054 euros, isn't it?

An important detail about the FX pip is that it depends on the accuracy of the price measurement. Some brokers offer 4-digit quotes – here the accuracy of price measurement is limited to ten thousandths. In this case, the change of the fifth decimal point in the EUR/USD price - for example, from 1.00000 to 1.00004 - will go unnoticed. A one-pip change for a 4-digit Forex broker will equal a 10 pip price change for a 5-digit quote.

Let us consider the spread for the EUR/USD currency pair

The exchange rate is 1.21232 to 1.21233:

the best sell price is EUR 1.21232,

the best buy price is EUR 1.21233.

The spread, or the difference between the quotes, is EUR 0.00001 or 1 pip. As you have probably guessed, Litefinance provides 5-digit quotes. 

Speaking about the minimum price move, let's analyze how the price of this instrument (EUR/USD) has changed during 5 minutes on a minute timeframe (M1).

The price is at the level of 1.21247.

After 10 minutes, the price increased slightly - to 1.21250.

The timeframe is small, that's why the growth is so small

It turns out that the price has grown by 3 pips from 1.21250 to 1.21247 or by EUR 0.00003.

The pip value of 0.00001 is also called "fractional pip" because it is 1/10 of the “standard” value with a 4-digit quote. Continue reading on Litefinance