A
pip is the smallest unit by which a cross price quote changes. When trading
Forex you will often hear that there is a 3-pip spread when you trade the
majors. This spread is revealed when you compare the bid and the ask price, for
example EURUSD is quoted at a bid price of 0.9875 and an ask price of 0.9878.
The difference is USD 0.0003, which is equal to 3 “pips”.
On a contract or position, the value of a pip can easily be calculated. You
know that the EURUSD is quoted with four decimals, so all you have to do is
cancel out the four zeros on the amount you trade and you will have the value
of one pip. Thus, on a EURUSD 100,000 contract, one pip is USD 10. On a USDJPY
100,000 contract, one pip is equal to 1000 yen, because USDJPY is quoted with
only two decimals.