A pip (percentage in point) is the smallest standard price movement in forex. For most currency pairs, one pip equals 0.0001 — the fourth decimal place. If EUR/USD moves from 1.0850 to 1.0851, that's a 1-pip move.
JPY pairs are the exception: one pip is 0.01 (second decimal place). So if USD/JPY moves from 149.50 to 149.51, that's also 1 pip. Some brokers show a fifth decimal (pipette) for extra precision, but the standard pip is what matters for your calculations.
The dollar value of a pip depends on your lot size. A standard lot is 100,000 units. For EUR/USD at 1 standard lot: 100,000 × 0.0001 = $10 per pip. A mini lot (0.1) = $1 per pip. A micro lot (0.01) = $0.10 per pip.
This is crucial for risk management. If your stop-loss is 20 pips away on a standard lot, you're risking $200. On a micro lot, the same stop-loss risks only $2. Position sizing is how professional traders control risk.
The spread is your transaction cost. If you open and immediately close a trade, you lose exactly the spread. For EUR/USD, competitive brokers offer 0.0–0.2 pip spreads. Less competitive ones might charge 1.5–3.0 pips.
Over time, spread costs compound. If you make 200 trades per month and each costs 1 extra pip ($10 on a standard lot), that's $2,000/month in unnecessary costs. This is why spread comparison matters.
Standard accounts build the broker's profit into the spread. You might see EUR/USD at 1.2 pips with zero commission. It's simple but more expensive per trade.
Raw/ECN accounts offer spreads starting from 0.0 pips but charge a commission per lot (typically $3–7 per side). For active traders, raw accounts are almost always cheaper. If you trade more than a few times per day, the math strongly favours raw spreads.