A price change of one decimal place is the smallest in forex trading. Considering that most major currency pairs, such as USD, EUR, and GBP, are priced to four decimal places, a pip is equivalent to 0.0001 in this scenario.
For example, if the GBP/USD exchange rate moved from 1.4000 to 1.4001, it moved by one pip. On the other hand, currency pairs based on the Japanese yen are quoted to only two decimal places. In this case, a pip corresponds to a change of 0.01 in the price.
Some forex brokers quote currency pairs to 5 decimal points rather than the standard 4 decimal points and quote currency pairs based on the Japanese yen to 3 decimal points rather than 2 decimal points. These extra decimal points are called fractional pips, also known as points or pipettes.
In trading, pips are commonly used to refer to gains or losses. For example, if a trader says that he made 40 pips on the trade, he means that he made 40 pips of profit. Depending on the pip value, this represents different amounts of cash.
Three factors determine the pip value: the currency pair being traded, the size of the trade, and the exchange rate. A single pip fluctuation can significantly impact the value of an open position.