Hi, Jessey, and welcome to the Forum.

If you’re like me, you learn best by taking things step-by-step.

So, let’s take the subject of [B]prices, and how they are divided into pips,[/B] step-by-step.

Suppose 1 British pound is worth exactly 1 dollar, 62 cents. In this case, we would write GBP/USD = 1.6200.

Now, suppose 1 British pound is worth 1 dollar, [B]62¼ cents.[/B] In this case, we would write GBP/USD = 1.6225. The last two digits (25) represent one-quarter cent (¼¢), and this can also be expressed as 25/100 of 1 cent.

[B]And, this can also be expressed as 25 pips.[/B]

Therefore, pips are simply hundredths of a U.S. cent when the cross-currency is USD; hundredths of a British penny when the cross-currency is GBP; hundredths of a Swiss cent when the cross-currency is the CHF; etc. (The Japanese yen is a special case, which we can talk about later.)

Because cents (or pennies) are 1/100 of basic currency units ($1, £1, etc.), we can also define 1 pip as 1/10,000 of a basic currency unit. So, when the cross-currency is USD, for example, 1 pip = 1/10,000 of 1 U.S. dollar. When the cross-currency is CHF, 1 pip = 1/10,000 of 1 Swiss franc. And so forth.

Suppose the price in our example above, GBP/USD = 1.6225, were to increase by 1 pip. What would the price become?

25 pips + 1 pip = 26 pips.

So, the price becomes GBP/USD = 1.6226.

The last digit (6) represents 6 pips.

The last two digits (26) represent 26 pips.

The last three digits (226) represent 226 pips.

The last four digits (6226) represent 6,226 pips.

And the entire price (1.6226) represents 16,226 pips.

What if the price is quoted in five decimal places? For example, what if the price were GBP/USD = 1.62263?

This can be a little hard on the eyes, but the principle is exactly the same: a pip is 1/100 of a cent, or 1/10,000 of an overall price. Therefore, the digits 26 still represent 26 pips, and the digit 3 represents 0.3 pip. That fifth digit is sometimes called a pipette.

Suppose the price were GBP/USD = 1.62263, and then suppose that it increased by 31.6 pips.

What would the new price be?

Initially, you might want to work out problems like this one with pencil and paper. But, eventually, you will get to the point where you can do a pip calculation in your head.

It goes like this: 26.3 pips in the previous price + 31.6 pips = 57.9 pips in the new price.

So, the new price would be GBP/USD = 1.62579

Here’s a homework assignment:

Suppose £1 = $1.62. And, suppose it increases to £1 = $1.63. By how many pips did the price of GBP/USD increase?