Foreign exchange quotes move in small increments that market participants describe in pips. The pip is a pricing convention that makes communication, measurement, and record keeping consistent across a market that spans currency pairs, time zones, and institutions. Understanding the pip and its fractional variant, the pipette, is foundational to reading quotes, interpreting spreads and costs, and translating price changes into monetary amounts.
What Is a Pip?
A pip is the standard unit used to express the smallest widely recognized increment of price movement in most spot foreign exchange quotes. For most currency pairs, one pip equals a movement of 0.0001 in the quoted price. For pairs that include the Japanese yen as the quote currency, one pip equals 0.01.
Examples help fix the idea:
EUR/USD: A move from 1.1000 to 1.1001 is 1 pip. A move from 1.1000 to 1.1055 is 55 pips.
USD/JPY: A move from 145.20 to 145.21 is 1 pip. A move from 145.20 to 145.85 is 65 pips.
These increments are expressed in the quote currency. In EUR/USD the quote currency is USD, so a pip is 0.0001 USD per euro. In USD/JPY the quote currency is JPY, so a pip is 0.01 JPY per U.S. dollar.
Why the Convention Exists
The global FX market is decentralized and operates around the clock. Standardized terminology shortens communication and reduces operational error. The pip convention arose in the interbank market to make price moves easily comparable across pairs and to separate economically meaningful changes from trivial rounding. The convention supports:
Communication between dealers and clients
Risk measurement in terms of uniform units, such as daily range in pips or stop distances expressed in pips
Operational processes such as confirmations, internal limits, and accounting
Although quotes can be displayed with more decimal places, the pip remains the standard reference unit for describing movements, spreads, and slippage.
Pipettes and Fractional Pricing
Many trading platforms quote prices using an extra decimal place to represent fractional pips, often called pipettes. A pipette equals one tenth of a pip.
Non-JPY pairs: 5 decimal places. For EUR/USD, 1.10543 differs from 1.10540 by 0.3 pip, or 3 pipettes.
JPY pairs: 3 decimal places. For USD/JPY, 145.203 differs from 145.200 by 0.3 pip, or 3 pipettes.
Fractional pricing reflects tighter quoting, finer tick sizes on electronic venues, and competitive market making. Even with fractional pips on the screen, industry conversation typically uses whole pips for clarity.
Decimal Conventions and Exceptions
The 0.0001 and 0.01 pip sizes are conventions, not laws of nature. Most widely traded pairs follow them. Some exotic or less liquid currencies historically used different decimal precision. Modern retail and institutional platforms have converged on the pip conventions described above, often with fractional pipettes. When in doubt, the determining factor is the number of decimals in the quote currency display. The pip is the fourth decimal place for most pairs and the second for JPY quote pairs. The pipette is the next decimal place beyond the pip.
How Pips Fit into Market Structure
FX is an over-the-counter market populated by banks, nonbank liquidity providers, electronic communication networks, brokers, and end users. Quotes reflect this structure. Pips appear in several places:
Quote dissemination. Prices stream through aggregators in fractional pips. Dealers often refer to the whole-pip level for clarity when discussing levels, while their algorithms operate at the pipette level or finer.
Bid-ask spreads. Spreads are commonly measured in pips. For EUR/USD, a quote of 1.0950 bid and 1.0952 ask has a 2-pip spread, or 20 pipettes.
Broker markups and commissions. Some retail brokers add a markup to the interbank price and express it in pips. Agency-style venues may charge per-lot commissions while pricing as tight as a few pipettes.
Order and fill quality. Slippage is often reported in pips. Internal analytics, trade cost analysis, and execution reports typically aggregate slippage, spread capture, or fill statistics in pips to allow comparisons across currency pairs and across time.
Risk and limits. In many institutions, position and stop-loss limits are set or monitored in pips to standardize across desks and geographies. Operations teams reconcile differences using pips as a common unit.
From Pips to Money: Lot Sizes and Notional Amounts
Pips express the price change in the quote currency per one unit of the base currency. To translate price movement into cash terms, multiply by the transaction size in base currency units.
Market convention uses lot sizes as shorthand for notional amount:
Standard lot: 100,000 units of the base currency.
Mini lot: 10,000 units of the base currency.
Micro lot: 1,000 units of the base currency.
The pip value in the quote currency for a standard lot on a non-JPY pair is typically 10 units of the quote currency. This follows directly:
For a 0.0001 pip size and a 100,000 base-unit notional, 100,000 × 0.0001 equals 10 units of the quote currency per pip. A mini lot produces 1 unit per pip, and a micro lot 0.1 unit per pip. For JPY quote pairs, the same logic with a 0.01 pip size yields 1,000 JPY per pip for a standard lot, 100 JPY for a mini lot, and 10 JPY for a micro lot.
Calculating Pip Value in an Account Currency
The monetary impact of a pip depends on the account or reporting currency. The general approach is to compute the pip value in the quote currency, then convert into the account currency at the prevailing exchange rate between the quote currency and the account currency.
Step 1. Compute pip value in the quote currency:
pip size × position size in base units = quote-currency amount per pip.
For most pairs, pip size is 0.0001. For JPY quote pairs, pip size is 0.01. Position size is measured in base currency units.
Step 2. Convert to the account currency:
If the account currency equals the quote currency, no conversion is needed.
If the account currency differs, convert using the spot rate between the quote currency and the account currency at the time of valuation.
Two common cases are worth highlighting.
Case A: USD-denominated account with USD as the quote currency. In pairs like EUR/USD or GBP/USD, the quote currency is USD. For a standard lot and a 0.0001 pip size, the pip value is exactly 10 USD per pip. It remains 10 USD per pip regardless of the level of EUR/USD or GBP/USD, because the unit of expression is directly USD per base unit.
Case B: USD-denominated account with USD as the base currency. In pairs like USD/CHF or USD/CAD, the pip value is first computed in the quote currency. For a standard lot, one pip equals 10 units of the quote currency. Converting 10 CHF or 10 CAD to USD introduces dependence on the current USD/CHF or USD/CAD rate. Pip value in USD is 10 divided by the spot price if the spot is quoted as USD per quote currency, or multiplied by the inverse, depending on the orientation of the available quote.
Cross pairs, where neither the base nor the quote currency matches the account currency, follow the same principle. Compute the pip value in the quote currency, then convert to the account currency using the appropriate cross rate.
Working Numerical Examples
Example 1: EUR/USD in a USD Account
Suppose EUR/USD moves from 1.1000 to 1.1055. That is a 55-pip move. For a standard lot of 100,000 euros, one pip is 10 USD. A 55-pip change corresponds to 55 × 10 equals 550 USD in absolute terms. For a mini lot, the amount would scale to 55 USD. For a micro lot, 5.5 USD.
Example 2: USD/JPY in a USD Account
Consider USD/JPY moving from 145.20 to 145.85. That is 65 pips because the pip size is 0.01. For a standard lot of 100,000 USD, one pip equals 1,000 JPY. To report in USD, convert 1,000 JPY at the prevailing rate. If USD/JPY is 145.50, then 1,000 JPY equals 1,000 divided by 145.50, or approximately 6.87 USD per pip. A 65-pip change would correspond to about 446.6 USD in absolute terms. Mini and micro lots scale by factors of ten and one hundred.
Example 3: GBP/CHF in a USD Account
Suppose GBP/CHF moves from 1.1250 to 1.1305, a change of 55 pips. For a standard lot, one pip equals 10 CHF. If the USD/CHF rate is 0.9100, then 10 CHF equals 10 divided by 0.9100, or about 10.99 USD per pip. A 55-pip move corresponds to roughly 604.5 USD in absolute terms.
Pips, Spreads, and Transaction Costs
The bid-ask spread is the most visible transaction cost in spot FX and is commonly measured in pips. Consider EUR/USD quoted at 1.0950 bid and 1.0952 ask. The spread is 2 pips. On a standard lot, this is 2 × 10 equals 20 USD in spread cost before fees or commissions. Pip-based measures make costs comparable across pairs. A 2-pip spread in EUR/USD is not the same monetary cost as a 2-pip spread in USD/JPY unless the lot size and conversion are specified, but the pip framework provides a consistent first reference.
Some venues quote spreads in pipettes. For example, a 0.3-pip spread in EUR/USD is 3 pipettes, or 0.00003. When aggregating costs across trades and currency pairs, institutions often convert to the account currency using contemporaneous rates, then sum in money terms. The intermediate reporting in pips helps diagnose pricing quality across providers.
Pips and Volatility Measurement
Volatility and range statistics are often summarized in pips. A daily high-low range of 80 pips in EUR/USD or 100 pips in USD/JPY offers a quick sense of recent variability without delving into percentage returns. Because pips are fixed price increments rather than fixed percentage changes, the same number of pips represents different percentage moves at different price levels. Converting pip ranges to percentage moves requires dividing by the prevailing price.
Relating pips to percentage points can be subtle. A basis point is one hundredth of a percent of price. For a price P, 1 basis point equals P × 0.0001. In EUR/USD near 1.0000, 1 pip is approximately 1 basis point. In USD/JPY near 100.00, 1 basis point equals 0.01 in price, which matches 1 pip. At USD/JPY 150.00, however, 1 basis point equals 0.015, or 1.5 pips. The correspondence between pips and basis points is therefore level dependent.
Spot, Forwards, and Other Instruments
The pip convention extends beyond spot trades. Forward points, which adjust the spot price for interest rate differentials, are often quoted in pips or pipettes. For example, a one-month forward for EUR/USD might be spot plus 47.3 pips, which means add 0.00473 to the spot rate. Dealers discuss forward rolls, broken dates, and swaps in the same pip units used for spot.
Exchange-traded currency futures define tick sizes and tick values by contract. The tick can be equal to half a pip, a full pip, or another increment depending on the contract. For instance, a euro FX futures contract specifies a tick size that corresponds to a fixed dollar amount per tick. The economic idea is the same: a smallest quoted increment with a known cash effect per contract. The precise numbers are exchange specific and published in contract specifications.
Pips, Ticks, and Points: Terminology
Terminology varies by platform and asset class. In FX spot, pip is the standard unit. Fractional pips are pipettes. Tick refers to the smallest increment in which a venue updates price, often a pipette on modern FX venues. Point is ambiguous. In some trading platforms, point means one pip. In others, point means one pipette. In equity index markets, point often refers to a one-unit change in the index level. Context matters, and platform documentation should be consulted to avoid confusion.
Precision, Rounding, and Valuation Details
Because pip value depends on the notional amount and often on a conversion into the account currency, the cash impact of a pip can vary with the level of the exchange rate used for conversion. Institutions typically translate PnL using end-of-day or real-time mid rates for the relevant currency pair. Rounding conventions differ by broker and back-office system. Some systems round to the nearest cent in the account currency, while others carry higher precision internally and round only at statement time.
When comparing quotes across providers, small discrepancies can arise from different numbers of decimal places, time stamps, and rounding rules. Fractional pips increase quoting precision but also require care when aggregating or reconciling records.
How Pips Interact with Liquidity and Market Microstructure
The depth of liquidity at each price level relates to the tick size, which in many FX venues is one pipette. A smaller tick size encourages tighter spreads by allowing market makers to improve quotes by a minimal amount. In highly liquid pairs such as EUR/USD or USD/JPY, spreads often compress to a handful of pipettes during active hours. In less liquid or stressed conditions, spreads widen in pips as providers step back or reduce displayed sizes. Because pips are uniform units, time-of-day patterns, news effects, and venue differences can be compared and analyzed in a consistent way.
Matching engines and aggregators prioritize price, then time, at the pipette granularity. Internalization by major dealers can result in slightly different visible quotes across venues. The pip acts as the lingua franca that ties these microstructural details back to a common descriptive framework used in reporting and oversight.
Cross Rates and Triangulation
When neither leg of a currency pair matches the account currency, pip value translation uses a cross rate. For example, an institution with a USD reporting currency that trades GBP/JPY will compute the pip value in JPY, then convert JPY to USD using USD/JPY. If the pip value is 1,000 JPY per pip for a standard lot in GBP/JPY, and USD/JPY is 150.00, the USD pip value is 1,000 divided by 150.00, or about 6.67 USD. Triangulation works the same way for any third currency and ensures that pip-based measures can be consolidated into a single reporting currency.
Risk Reporting and Controls
Risk systems often store positions and sensitivities in pips. A desk might monitor maximum adverse excursion in pips or daily realized dispersion in pips to keep comparisons consistent across pairs. Compliance teams may set thresholds for trade amendments measured in pips to flag unusual behavior. These operational uses lean on the clarity and universality of pips as a unit of account for price movement in FX.
Real-World Context: From Quote Screens to Back Office
Consider a typical workflow. A client receives a streaming EUR/USD price from several providers and observes that one venue shows a spread of 0.2 pip while another shows 0.5 pip. The client chooses the tighter venue and executes a standard-lot trade. The fill report displays the execution price with five decimals and notes slippage of 0.1 pip from the top of book due to queue position. The trade confirmation sent via a messaging network records the price to five decimals and the size in base currency units. In the back office, the position is revalued at end of day, with PnL explained by an 18-pip favorable move. The statement shows a commission in currency terms and the effective spread cost in pips for auditability. At each step, the pip provides a common unit that links market data to accounting.
Common Misunderstandings and Edge Cases
Confusing pips and percentage points. A 100-pip move in EUR/USD is a 0.0100 change in price. The percentage move depends on the starting price. If EUR/USD moves from 1.1000 to 1.1100, that is about a 0.91 percent change, not exactly 1 percent.
Assuming pip values are constant across all pairs. Pip value in account currency is constant only when the account currency equals the quote currency and the lot size is standard. Otherwise it varies with the conversion rate between the quote currency and the account currency.
Point versus pip on trading platforms. Some platforms label a pipette as a point. Others use point to mean one pip. Misinterpreting the label can lead to errors in reading spreads, slippage, or order parameters.
Exotics and unconventional quoting. Some less liquid currencies have historically used nonstandard decimal precision or larger minimum increments. Modern platforms often still convert to a pip framework for reporting, but traders in these markets need to verify the decimal convention in use before interpreting pips.
Mixing valuation times. Calculating pip-based PnL using one time stamp and converting to the account currency using another can produce small differences in reported PnL. Institutions reduce these discrepancies by defining precise valuation and conversion snapshots.
Relating Pips to Balance Sheet and Margin
On leveraged accounts, small pip movements can translate into meaningful variations in mark-to-market equity because notional sizes can be large relative to posted margin. Clearing firms and brokers compute variation margin in account currency. The pip provides a transparent way to understand how much mark-to-market movement to expect for a given position size. For instance, a 30-pip intraday range in EUR/USD corresponds to 300 USD per standard lot in raw price movement before fees or conversions are considered.
Numerical Practice: Converting Pip Moves to Money
The following brief exercises illustrate the translation process.
Case 1. AUD/USD rises from 0.6520 to 0.6568. The move is 48 pips. For a mini lot, the pip value is 1 USD per pip. The monetary change is 48 USD.
Case 2. USD/CAD declines from 1.3460 to 1.3415, a 45-pip move. For a standard lot, the pip value is 10 CAD per pip. If USD/CAD is 1.3425 at valuation, the pip value in USD is 10 divided by 1.3425, or about 7.45 USD per pip. The total absolute change is about 335.1 USD for a 45-pip move.
Case 3. NZD/JPY moves from 89.30 to 88.90, a 40-pip move. For a standard lot, one pip is 1,000 JPY. With USD/JPY at 150.00, each pip is 6.67 USD. The total absolute change is about 266.8 USD.
Why Pips Remain Central
Technology has transformed how FX is quoted and traded, yet pips endure as the shared language that connects voice markets, electronic venues, sales coverage, and back-office functions. The pip compresses a complex set of details into a manageable unit that is easy to audit and compare. The convention is flexible enough to adapt to fractional pricing while remaining intuitive for high-level communication.
Practical Notes for Clear Communication
Clarity improves when all parties specify the decimal convention and lot size. When discussing costs, explicitly stating spreads in pips and commissions in currency terms avoids confusion. When analyzing performance or execution quality, reporting both pips and converted monetary amounts helps preserve comparability across pairs while grounding the analysis in the account currency. Finally, when working with platforms that use the term point, checking whether point refers to a pip or a pipette prevents misinterpretation.
Key Takeaways
- A pip is the standard unit for FX price changes, equal to 0.0001 for most pairs and 0.01 for JPY quote pairs, with pipettes representing one tenth of a pip.
- Pips provide a common language for quotes, spreads, slippage, volatility, and risk reporting across the decentralized FX market.
- Pip value in money terms depends on position size and the relationship between the quote currency and the account currency.
- Spreads, forward points, and many operational metrics are measured in pips, while fractional pricing often shows pipettes on screens.
- Terminology varies by platform, so confirming whether a point means a pip or a pipette avoids errors in interpretation.