Understanding key Forex concepts such as points and pips is vitally important, particularly to novice traders just entering the marketplace. These terms serve to measure price movements between currency pairs. An understanding of points and pips will assist traders make informed trading decisions; this article explores their definition and significance within Forex trading.
Points (commonly referred to as pipettes in Forex trading) represent the smallest unit of price change on Forex, usually representing the fourth decimal place for currency pairs such as EUR/USD. If an exchange rate shifts from 1.3500 to 1.3501 on EUR/USD currency pair it indicates an increase of one point or pipette compared with prior value; although points still have their place when it comes to profit/loss calculations.
Pips (short for "percentage in point") is the standard unit of measurement in forex trading. Pips represent four decimal places except when measured against Japanese yen pairs where it measures at two decimal places instead. When an exchange rate shifts from 1.3504 to 1.3505, five pips has increased and vice versa; Pips play an essential part in calculating potential profits or losses when investing.