Pips?

The most repeated word in Forex currency trading is pip. Pip stands for percentage in point. A pip is the smallest unit of currency.

Ex.

$0.1234

The pip is in the fourth decimal place on every currency except Japanese (¥)

¥0.12

Pippin’ is easy

Different currencies have different pip values.

Ex.

For the USD/JPY
90
For JPY the pip is .01
Pip Value/Exchange Rate
.01/90=.0001111

For EUR/USD
1.5
For EUR use .0001
Pip Value/Exchange Rate
.0001/1.5=.00066

When a trade is completed the profit/loss is displayed in pip value. The pip value may be displayed as EUR instead of USD. A conversion will need to be done.

Ex.
Referring back to the EUR/USD example:

EUR/USD=1.5
Pip Value= .00066
Pip Value times USD conversion
.00066*1.5=.000999 (Rounds to .0001)

And Lots?

Why does Forex use such small numbers?

On the Foreign Exchange Market currency is purchased in lots. A trader cannot use $1 to buy €1.5. A lot of €s is purchased. The typical lot is $100,000, some brokers offer as low as $10,000. A much larger profit is realized through these purchases.

Ex.

Calculating Forex profit.

EUR/USD=1.50 (€1=$1.5)
I have $100,000 I buy €66,666.
EUR/USD rises to 1.5020
This is an increase of 20 pips.
I sell my € to buy $
Pip Value
(.0001/1.502)*100,000=$15.02 per pip
Profit
15.02*20pips=$300.40
That’s only one trade!