DEFINITION of 'Pip'
In finance, specifically in foreign exchange
markets, a percentage in point
) is a unit of change in an exchange rate of a currency pair. Since most major currency pairs are priced to four decimal places
, the smallest change is that of the last decimal point – for most pairs this is the equivalent of 1/100 of one percent
, or one basis point.
For example, the smallest move USD/CAD currency pair can make is $0.0001, or one basis point. The smallest move in a currency does not always need to be equal to one basis point, but this is generally the case with most currency pairs.
A pip is sometimes confused with the smallest unit of change in a quote, i.e. the tick size. Currency pairs are often quoted to four decimal places, but the tick size in a given market may be, for example, 5 pips or 1/2 pip.
A rate change of one pip may be related to the value change of a position in a currency market. Currency is typically traded in lot size of 100,000 units of the base currency. A trading position of one lot that experiences a rate change of 1 pip therefore changes in value by 10 units of the quoted currency.