We look again at the GPB/USD rate. We can see that it is expressed in 4 decimal places.
Most of the currency pairs are typically expressed in 4 decimal places and they usually have before the dot (.) a 1 digit number.
Some currency pairs most of which have the Japanese Yen (JPY) as quote are typically expressed in 2 decimal places. These currency pairs also usually have before the dot (.) a 2 digit number.
A Pip for each currency pair is the smallest unit of measurement used to measure the change in the currency pair.
For currency pairs that are expressed in 4 decimal places 1 pip = 0.0001
For currency pairs that are expressed in 3 decimal places 1 pip = 0.001
For currency pairs that are expressed in 2 decimal places 1 pip = 0.01
Therefore we can represent the above quotations in this form
You will hear a lot of the time Forex Brokers say our spread in GBP/USD is 3 pips or our spread in USD/JPY is 4 pips. This is what the meaning is. You clearly want the spread to be as little as pips as possible.
Fractional Pip Pricing (5 digits)
A lot of brokers decide to use additional decimal places when quoting their FOREX rates.
For example they will quote with 5 decimals currency pairs that have 4 decimal places and with 3 decimal currency pairs that have 2 decimal places.
The extra decimal place used is called a Fractional Pip .
This extra decimal allows for the trader to make profits/losses from smaller fluctuations in the value.
Measuring change in pips
Let us say we bought EUR/USD at this rate 1.3110 .
We later sell it at 1.3150. Hence we made a profit of 40 pips as the price rose 40 pips .