The Almighty Pip

When the exchange rate of a currency pair goes up or down, the amount that it goes up or down is described in pips.

The pip is the smallest price change of the exchange rate. For example, when trading EUR/USD the smallest price change is 0.0001. A move from, say, 1.2541 to 1.2542 is called a 1 pip move.

Another example: if the price of EUR/USD is currently 1.2580, and moves up to 1.2585, this is a 5 pip move. If you buy at 1.2590 and sell at 1.2640, this is a 50 pip profit (i.e. 1.2590 - 1.2640).

With the exception of the Yen, exchange rates are quoted up to 4 decimal points.

Here is how the pip is displayed for the major currency pairs:

The USD/JPY rate has 2 decimal points only. The rules still apply: 1 pip is equal to a movement of 1 in the last decimal point. So a 25 pip move will be a move from, say, 125.20 to 125.45.

You measure profit or loss in pips.

When you make, say, 50 pips profit on a EUR/USD trade, the 50 pip profit is in the counter currency, not the base currency. So, if you're long the EUR/USD (i.e. you bought Euro) and you make a 50 pip profit, the profit is in $USD.

Here is why:

When you buy, say, $100,000 worth of EUR/USD, you have bought $100,000 worth of euros and sold an amount of USD to get this $100 000 worth of euros.

If after a few hours the EURUSD has gone up from, say, 1.2600 to 1.2650, you have made 50 pips profit. To exit the trade and take your profit, you have to sell the euro and buy back the USD. But because the rate has gone up (the euro has strengthened), you have bought back more USD, in fact 50 pips more USD.