The unit of exchange rate fluctuations in forex

In the forex market, exchange rate fluctuations are typically measured in terms of "pips." "Pip" stands for "percentage in point" or "price interest point," and it represents the smallest incremental movement in the price of a currency pair. The term "pip" is used to quantify the change in value between two currencies.

A pip is usually the last decimal place of a currency pair's price quote. For most major currency pairs, a pip is equivalent to 0.0001 (four decimal places). However, for currency pairs involving the Japanese yen (JPY), a pip is typically represented as 0.01 (two decimal places) due to the lower value of the yen compared to other major currencies.

For example:

• If the EUR/USD currency pair moves from 1.1000 to 1.1001, it has moved 1 pip.

• If the USD/JPY currency pair moves from 109.50 to 109.51, it has moved 1 pip.

Pips are fundamental to calculating profit and loss in forex trading. Traders use pips to determine how much they have gained or lost on a trade. The number of pips a trade moves in a specific direction, combined with the trade's position size (lot size), influences the monetary gain or loss.

It's important to note that while pips are a common measurement, the actual monetary value of a pip varies based on the size of the trade (lot size) and the currency pair being traded. Additionally, some brokers offer fractional pips, also known as "pipettes," which represent even smaller price increments.