Today is a particularly quiet day in the markets – traders and investors the globe over are waiting anxiously for the Fed’s decision coming later this afternoon.
So we thought we’d take just a second to review one of the great mysteries of the foreign exchange market – the “pip.”
It is the smallest price change that an exchange rate can make. Since most major currency pairs are priced out to four places past the decimal point, when the last digit to the right moves up or down by one increment, that's a one pip move.
If you were trading the euro vs. the U.S. dollar (EUR/USD) and that exchange rate moves from 1.5540 up to 1.5541, then it increased one pip. If it fell from 1.5541 to 1.5540 then it decreased one pip.
Think of a stock. If a stock increases a penny - and moves from US$50.00 up to US$50.01 - then that stock just made the smallest incremental movement possible.
For the EUR/USD, one pip is the smallest incremental move possible. So it moves up one pip by moving from 1.5540 to 1.5541.
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