What is PIP ?

PIP Means Percentage In Points

All prices in the Forex market are quoted with 4 decimal point in a quote. Eg.GBP/USD 1.9455
• Only the USD/JPY currency is quoted with a 2 decimal point. Eg USD/JPY 122.33
• Note: When a base currency is stronger, it increases the value of the quoted currency.
• If the quoted currency is lower, it simply means to say that the base currency is weakening.
• For eg If GBP/USD increases from 1.9455 TO 1.9555 that means GBP has gone up by 100 pips AND if it decreases to 1.9355 it means GBP has gone down by 100 pips ( Note:- You Ignore the Decimal Points)

First of all you must understand currency quoting conventions and the difference between the base currency and the terms ( Quote ) currency. As earlier described about Base / Quote Currency in the Forex introduction Chapter Introduction to Currency Pairs

In the spot Forex market (but not localized futures markets) the quoting conventions are:

Base / Quote Currency:
EUR/USD
GBP/USD
USD/CHF
USD/JPY
AUD/USD

The following rules:

EUR always base
GBP always base except EUR/GBP
Old colonial like AUD / NZD Always base except EUR / GBP
USD always base except UER / GBP / Old colonials
CHFJPY

Pip values:

To express the value in the terms currency multiply 1 pip with the lot value:

EURUSD pip = 0.0001 X 100,000  ( lot ) = $10.00
EURUSD pip = 0.0001 X 10,000 ( lot ) = $1.00

To convert to the base currency divide by exchange rate:

Say EUR/USD exchange rate = 1.4750 = $10.00 / 1.4750 = EUR 6.78

Say USD/CHF exchange rate = 1.1015 = $10.00 / 1.1015 = $9.08

JPY works same principle 2nd decimal.

Difference Between Sell / Buy = 3 PIPS

The spread is closely associated with the pip and has a major importance for you as a trader. It is the difference between the selling and the buying price of a currency pair. It is the difference in the bid and ask price. The ask is the price at which you buy and the bid is the price at which you sell.

Suppose the EUR/USD is quoted at 1.4502 bid and 1.4505 ask. In this case the spread is 3 pips.

The pip spread is your cost of doing business here. In the case above it means you sustain a paper loss equal to 3 pips at the moment you enter the trade. Your contract has to appreciate by 3 pips before you break even. The lower the pip spread the easier is it for you to profit.

Generally the more active and bigger the market, the lower the pip spread. The smaller and exotic markets tend to have a higher spread. Most brokers will be offering different spreads for different currencies. Smaller accounts will generally have higher spreads than bigger regular accounts.

From the profitability point of view it is important to find a broker offering a lower pip spread, however the low spread is not everything. Be sure you choose a reputable broker.