In forex trading, a Pip represents the smallest incremental price movement that an exchange rate can make based on market convention. For most currency pairs, a Pip is equivalent to a movement of 0.0001 (or 1/100th of 1%) in the quoted price. This standardization allows traders to quantify changes in currency prices and assess potential profits or losses.

For example, if the exchange rate for the EUR/USD pair moves from 1.1050 to 1.1051, it has increased by 1 Pip. Similarly, if it moves from 1.1050 to 1.1049, it has decreased by 1 Pip. The concept of Pips is central to forex trading because it provides a simple way to discuss and measure price movements without the need for large numerical values.

While most major currency pairs are quoted to four decimal places (e.g., 1.1050), some pairs involving the Japanese yen (JPY) are quoted to two decimal places, where a Pip would be 0.01. For example, if the USD/JPY exchange rate moves from 110.25 to 110.26, it has increased by 1 Pip.

Understanding Pips is essential for forex traders, as they form the basis for calculating the spread, profits, and losses. The value of a Pip can vary depending on the size of the trade and the currency pair being traded.