Well first off, lets get the lingo right. PIP actually stands for Percentage In Points. And the easiest way to think of it is as the smallest denomination of a trading point.

For all currencies on the market today. A pip is usually expressed as 0.0001 (Thats four decimal places). Remember how i said this was true for all currencies? Yeah well i lied! When working with the Japanese Yen, a pip is expressed as 0.01.

If your confused. Take this analogy. When you go to a shop. What is the smallest possible piece of money you can hand over? Generally it will be one cent. You cant get any smaller then one cent can you? And if the shop keeper wanted to up the price of an item, what would be the smallest increase? One cent once again!

First, lets start out with an easy example.

If we bought USD currency when the rate was at 1.2123 and then we sold at 1.2133. We would then say that we have made 10 pips (Notice the increase). I bet all those numbers on the daily news now make sense!

So if we made 10 pips, how does that convert into everyday currency? Simple. Just use this equation :

Pip Movement x $(Initial Investment) = $Profit

Using the above equation, we can work out our profit margins. Say we invested $10,000 into the currency market, and we made 20 pips before we sold once again.Then we would have :

0.0020 x $10,000 = $20

Do this with any number and you will quickly see that for every pip in $10,000, you make $1. This is usually used when using Mini-Trader accounts.

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Forex Trading For Dummies