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In forex trading, PIPs or Price Interest Points are commonly used by forex traders to indicate profits or losses. It's not unusual for a forex trader to say "I gained 50 pips on the deal."
A PIP is used for measuring the change of rate in a currency pair. For currency pairs that display rates as four decimal places, one pip equals 0.0001. This includes most leading currencies like USD, EUR, AUD, CAD, and GBP.
Example 1: Let's say the price of EUR/USD is 1.2399. If the price of this pair increases to 1.2400 or decreases to 1.2388, it would mean a change of 1 PIP.
The exception to this rule is currency pairs that include yen as these are displayed in two decimal places.
Example 2: USD/JPY is displayed as 115.22 with only two decimal points, so a one pip change in USD/JPY will be 115.21 or 115.23. Similarly, EUR/JPY is displayed as 142.84, and a one pip change for EUR/JPY will be 142.83 or 142.85.
The small size of PIPs ensures investors don't lose huge amounts of money.
The impact of changes in PIPs depends on the amount of units purchased or sold. If the price of EUR/USD is 1.2399 and if you bought 10,000 units of this currency pair, it will cost USD 12,399. Let's say the price of this pair increased by a PIP to 1.2340, the total price will increase to USD 12,340, and you will gain USD 1 from this trade (12,340-12,399).
On any given day, the price fluctuation for most currencies is between 100 to 150 pips.
If you are into forex trading, check our Forex calculator for calculating the margin used.
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