It is unimaginable to think that foreign exchange traders use a small unit of measurement of profit to measure their overall efficiency. However, it is quite the opposite. Somewhere in the world, twenty-four hours a day, Forex traders can sell and buy currency trades at levels nearing one-thousandth part of a currency’s value. This is known as a “pip”.

But how does Forex measure pips?

Essentially, a pip is just a percentage of a national currency unit. One can tell the current value of a pip by simply looking at the last number in the sequence right after the decimal point, in the currency’s unit value.

Example: The exchange rate of a currency used to buy another currency determines the value of all the other currencies on the Forex. If the Euro is worth 1.3338, the pip value would be 8 (because it is at the end of the sequence of numbers after the decimal point). In this instance, the pip is worth 8/10,000^th of one U.S. Dollar. But, if the Euro’s value were to suddenly rise by 20 pips against the U.S. Dollar, then the ticker would show an updated value, in the form of the last tick at Euro 1.3358.

How the pros make real profits trading pips.

The whole idea behind making a profit from any traded security of commodity is simply: buy low and sell high. Pip Trading is similar in nature. The objective of a trader is to trade as many pips as possible.

As pips are so small, traders have better advantages trading pips by using larger blocks of currency. Example: If a trader has a currency lot of 100,000 currency units, then the pip value will be around $10. Now, contrast that to a trade account with 10,000 currency units, and the same pip transaction would only yield about $1.

The elementary concept is that the more money on the actual trading floor, equals greater leverage for the larger pip value. In trader terminology, a “pip change” is the smallest of fractional change in a price.

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