A pip can best be described as the smallest increment in price of a currency pair being offered. In the case of the EUR/USD above, we can see that one pip or point is worth 0.0001, (or 1/10,000) the last decimal point of a quote. The pip is how we calculate our profit or loss on trades.
It should be noted that on most currency pairs 1 pip is equivalent to 0.0001, or the fourth number after the decimal point. However, when trading JPY crosses 0.01 is a pip (1/100) the second number after the decimal point.
Calculating the Value of a Pip or Point
In order to calculate the value of one pip the following needs to be done:
Major Currency Amount Traded * the Pip value = amount in the secondary currency.
Either divide (if the USD is the major currency), or multiply (if the USD is the secondary currency) this number by the USD exchange rate to receive the pip value in USD.
As mentioned before, the profit or loss on a trade is always calculated in the secondary currency, but in most cases the broker will do all these calculations automatically and convert all profit and losses to the currency of the initial client deposit. Although when trading it is not necessary to know how to work these values out, it is of course useful to know how it is calculated.
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