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Forex PIP stands for Percentage In Point and are essentially the smallest denomination that you can trade within the currency market. Confusing I know, but just think as it of this. A PIP in almost every market is simply 0.0001 (Four decimal places). This is true with every market except for the Japanese yen which only goes to two decimal places (0.01).
If you need a simpler analogy. Just imagine money in everyday life. The smallest piece of money you can have in general is one cent. If you were to go to a shop and buy something, you cannot pass anything over less then one cent. In the same instance, if the shop keeper was to up his prices, he would have to go in one cent increments.
So your probably thinking, If a PIP is 0.0001, where will I use this? Well at the very basic levels it is the easiest way of finding out your profit margin. For example, if you bought USD currency at 1.2134, and then sold at 1.2144. You would say you have “made 10 PIPs”. And if your thinking that you have seen these sort of numbers before, then you are right. They are shown everyday on the evening news!
So if we make 10 PIPs, how much is that in real money terms? There is an easy mathematical equation to working out your profit using PIPs. It goes:
PIPs Made X $(Initial Investment) = $(Profit Made)
Just as a further example. If we invested $10,000 into the market. And then sold after we were up 20 PIPs. It would work out something like this:
0.0020 x $10,000 = $20
So $20 profit. If you play around with these numbers a bit, you will realise that for every PIP you gain with a $10,000 investment, you will gain $1 profit (Or loss!).
