A pip is the fundamental unit of measurement in Forex and the distance between two points in a certain Forex market is cited using pips. A pip is the fourth decimal place (0.0001), or one-hundredth of one percent. Most currency pairs, except those containing the Japanese yen (JPY), will count pips starting with four digits beyond the decimal point. Spreads, which are the difference between the bid and ask prices, will usually be expressed in terms of pips by a broker.

For currency pairs cited to the fourth digit beyond the decimal point, a pip is equal to dividing 1/10,000 or 0.0001 by the exchange rate. For example, if the buy price on the EUR/USD pair is 1.2085 and the sell price is 1.2084, the spread would be 1 pip. The smaller the spread, the better pricing traders will receive when executing trades through a broker.

Currency pairs containing the Japanese yen do not adhere to the four-digit rule and instead are cited to two digits beyond the decimal point. The value of a single pip will be equal to 1/100 divided by the current exchange rate. For example, if the buy price on the EUR/JPY pair is 129.03 and the sell price is 129.02, the spread is 1 pip.

Many times, Forex traders and brokers will express the profit or loss on a single closed trade in terms of pips. Essentially, pips are a convenient way of communicating the value or difference in value in the Forex industry.