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Pip is an abbreviation for “percentage in point” or “price interest point.” Based on forex convention, a pip refers to the slightest price changes that an exchange rate makes. The pip change is the last fourth decimal point of the currency pair and is equivalent to one-hundredth part of 1% or one basis point.
For example, the slightest price move the currency pair USD/CAD can make is $0.0001 or one basis point.
A pip is a basic part of the forex trading market. To simply quote it, traders sell or buy a currency that is quoted against another currency. Forex currency pairs help to spread the exchange rates through the bid-ask spread.
The exchange rate movement is measured in terms of pips. Usually, currency pairs are quoted up to four accurate decimal points. The smallest price movement for the currency pairs is one Pip or 0.0001. The pip value can be measured by 0.0001 by the exchange rate or by dividing 1/10,000.
Pip refers to the spread between the bid and ask price of the currency pair. It will also help you to estimate the gain or loss through a trade. For instance, a trader who wishes to buy the USD/CAD currency pair means he would be selling Canadian dollars in exchange for US dollars or vice versa.
How is the value of a pip estimated? Japanese yen (JPY) is an exception. JPY pairs (for example, EUR/JPY and USD/JPY) are quoted to only two decimal points. For these currency pairs, the Pip refers to the 1/100 divided by the exchange rate. For instance, EUR/JPY is quoted as 132.62.
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