In currency trading, the value of the last significant decimal place in the exchange rate in a currency quote, which is the smallest amount by which the value of a currency can change. From “price interest point.” Generally this is the fourth decimal place, except for U.S. dollar/Japanese yen contracts, where it is the hundredth decimal place. Movements (changes in the relative price of a currency) are described in pips. For example, here are two quotes:

EUR/USD:0.9518/23   (Monday)

EUR/USD:0.9536/41   (Tuesday)

The first currency (in this example, “EUR” for euros) is called the base currency and the second (“USD” for U.S. dollars) the quote currency. After identifying the currencies, the quote gives the bid price followed by the last significant digits of the ask price. In these examples, the bid price (0.9518) is how many U.S. dollars will be obtained for one euro. The ask price (0.9523); dividing this number into 1 gives the number of euros that can be obtained for one U.S. dollar (1/0.9523 = 1.0501 euros for 1 dollar). In the example, a movement of 18 pips occurred between the two bid quotes, so on Tuesday you could get more dollars for your euros than you could have on Monday: the dollar fell.

The spread (the difference between the bid price and the ask price, which is the cost of the trade, or the trader’s commission) is denominated in pips. In the examples above, the spread is 5 pips. Trades of a million dollars or more may have a spread even lower than 5 pips; smaller trades will have a larger spread. Credit card companies use a spread of 200 to 300 pips. The typical range of spreads used by banks and exchange bureaus is 200 to 1000 pips, and they may charge a commission on top of that.

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