A pip stands for "percentage in points" or "price in points". This term represents the smallest price increment of a currency pair and measures the amount of change in the exchange rate.
How PIPs Are Calculated
The calculation of a pip depends on the currency pair being traded:
For FX majors and minors (excluding JPY): A pip is the 4th decimal point (0.0001)
For JPY pairs: A pip is the 2nd decimal point (0.01)
Using PIPs in Trading
A pip is often referred to as a point and used as a reference for measuring trade parameters:
Stop-loss levels: The distance from your entry price to your stop-loss order
Target levels: The distance from your entry price to your profit target
Risk-reward ratios: Comparing potential profit to potential loss
Example: A trade with a 50 pip stop-loss and a 100 pip target demonstrates a 2:1 risk-reward ratio.
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