A pip, short for “percentage point” or “price interest point,” is a small indicator of a currency pair’s adjustment in the forex market. It can be calculated in terms of the quote or in terms of the currency underlying it.

A pip is the smallest sum by which a currency quote may adjust and is a standardized unit. For U.S.-dollar based currency pairs, which is more generally referred to as 1/100th of 1 percent, or one basis point, it is typically $0.0001. In order to protect investors from massive losses, this uniform size helps. For example, a one-pip shift would cause greater volatility in currency values if a pip was 10 basis points.

Assume that we have a direct quote of USD / EUR of 0.7747. What this quote means is that around 0.7747 euros can be purchased for US$ 1. If this quote were to increase by one pip (to 0.7748), the value of the U.S. dollar would increase compared to the euro, since US$ 1 would make it possible for you to buy slightly more euros.

What is the effect of pip adjustment?

The effect of a one-pip adjustment on the amount of the dollar, or pip, depends on the number of euros bought. If an investor with U.S. dollars purchases EUR 10,000, the price charged will be US$ 12,908.22 ([1/0.7747] x 10,000). The price charged would be $12,906.56 ([1/0.7748] x 10,000) if the exchange rate for this pair experienced a one-pip rise.

In that case, the pip value is US$ 1.66 ($12,908.22-$ 12,906.56) on a lot of 10,000 euros.

If, on the other hand, at the same initial price, the same investor buys EUR 100,000, the pip value is US$ 16.6. As this example illustrates, depending on the amount of the underlying currency (in this case, the euro) purchased, the pip value increases.