Understanding PIPs (Points in Price)
A PIP, short for Point in Price, is the smallest unit of measurement used when trading currencies. It serves as a measure of the change in the exchange rate of a currency pair.
Standard Currency Pairs
Most currency pairs (such as EUR/USD or GBP/USD) are typically measured to five decimal places.
- For these pairs, the PIP value corresponds to the fourth decimal digit.
Yen-Based Currency Pairs (The Exception)
Currency pairs involving the Japanese Yen (e.g., USD/JPY) follow a different structure:
- Yen pairs are measured to only three decimal places.
- The PIP value is shown in the second decimal digit.
Detailed Summary
A PIP (Point in Price) is defined as the smallest unit used to measure changes in the exchange rate of a currency pair during trading. The standard convention is for most currency pairs (like EUR/USD or GBP/USD) to be quoted to five decimal places, where the PIP corresponds to the fourth decimal digit. The primary exception is currency pairs involving the Japanese Yen (e.g., USD/JPY), which are only measured to three decimal places, meaning the PIP value is located in the second decimal digit.
Key Takeaways
- A PIP stands for Point in Price and serves as the smallest unit of measurement for currency fluctuation.
- It measures the change in the exchange rate of a currency pair.
- Most standard currency pairs are measured to five decimal places.
- For standard pairs, the PIP value is represented by the fourth decimal digit.
- Yen-based currency pairs (e.g., USD/JPY) are an exception to the standard structure.
- Yen pairs are measured using only three decimal places.
- For Yen pairs, the PIP value is located in the second decimal digit.