A pip is the smallest unit used to measure price movement in CFD trading. It is used to measure how much the price of a financial instrument has changed upward or downward. Usually, a pip is the digit before the last digit in an instrument’s price, such as the fourth decimal place in most currency pairs.
Pip Value
The pip value is the monetary equivalent of the smallest price movement, measured in dollars. The pip value varies according to the lot size used in the trade, as the pip value increases when the lot size increases.
Why Is a Pip Important to a Trader?
A pip is used as a standard unit to measure any market movement, whether when determining the distance between the entry price and the Stop Loss, calculating the price difference between the buying and selling prices, known as the Spread, or evaluating how far the price has moved in favor of or against the trade. It serves as a “common language” for measuring volatility, regardless of the financial instrument being traded.
Illustrative Example
If the price of a particular financial instrument moves by 10 pips, and the trade size is 1 lot, the monetary value of this movement in dollars would be:
10 pips Ă— 10 dollars (pip value for a 1-lot size) = 100 dollars
This means that every pip by which the market moves in the direction of the trade or against it is directly translated into a change in the trade’s value in dollars.
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