This is probably the most used word in term of currency trading; Pip. Not only that it is easy to be spelled but also because it is what traders hunt in currency trading. Many trader say that knowing how many pips you gain or lose is more important than knowing how much money you gain or lose (in few case, I agree with this opinion).

In brief and general, forex pip is the smallest price change that a given exchange rate can make. Therefore defining ‘1 pip‘ for each currency pairs is dependent on the exchange rate (quoted price) given to the related pair. Let me take GBP/USD, GBP/JPY as an example. What is ‘1 pip’ for those pairs?

GBP/USD are commonly quoted into four decimal points (eg, 1.8397). Then ‘1 pip‘ for GBP/USD in this case is equal to 0.0001 price change (be it higher or lower).

GBP/JPY are commonly quoted into two decimal points (eg, 193.57). Then ‘1 pip’ for GBP/JPY in this case is equal to 0.01 price change (be it higher or lower).

Now let’s bring it a bit further. Many traders probably do not realize that the ‘decimal points’ matter is particularly depending on related forex-broker’s policy. Any forex broker could implements different decimal points from the other company do for the same currency pair.

For example, FXPro has recently (as of September 1st, 2008) implemented five decimal points for GBP/USD (eg, 1.83972). This subsequently gives different definition to ‘what 1 pip is‘ for this pair (compared to the above example). In this case, ‘1 pip’ for GBP/USD is equal to 0.00001 price change.

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