A pip represents the smallest unit of price change a currency pair can make under a standardized convention. For most major pairs this is the fourth decimal place: when EUR/USD moves from 1.0850 to 1.0851, that's a one-pip move.
Yen pairs are the exception. Because USD/JPY trades around 100 (not around 1), pip-size is the second decimal: USD/JPY moving from 155.42 to 155.43 is one pip.
The fractional pip — one tenth of a pip — is called a pipette. Brokers quote pipettes for tighter spreads (a "0.8 pip" spread = 8 pipettes).
Examples
- EUR/USD
1.0850 → 1.0851= 1 pip (10 pipettes) - GBP/USD
1.2410 → 1.2425= 15 pips - USD/JPY
155.42 → 155.43= 1 pip - USD/JPY
155.42 → 155.92= 50 pips - XAU/USD (gold)
2381.40 → 2381.50= 1 pip ($0.10 move)
Why pip matters
Pips are the unit traders use to express stop-loss distance, take-profit distance and position size risk. Without a standard unit, comparing trades across pairs would be messy.