Forex trading is a lucrative investment opportunity that has gained popularity over the years. However, it comes with its fair share of risks, including the potential for losses. As a forex trader, it is essential to understand how to calculate your gains or losses using pips. In this article, we will explore what pips are and how to use them to calculate forex gain or loss.
What are Pips?
A pip is a unit of measurement used in forex trading to denote the smallest possible price movement in a currency pair. It stands for “percentage in point” or “price interest point,” and it is the fourth decimal place in a currency pair that is quoted in five decimal places. For example, if the EUR/USD currency pair is quoted as 1.12345, the fifth decimal place is a fraction of a pip.
Pips are used to measure changes in the value of a currency pair, and they are essential in determining profit and loss in forex trading. A pip is usually equivalent to 0.0001 or 1/100th of a percentage point. However, for currency pairs that involve the Japanese yen, the pip is the second decimal place, and it is equivalent to 0.01 or 1/100th of a yen.
How to Calculate Forex Gain or Loss Using Pips
To calculate forex gain or loss using pips, you need to understand how to calculate the pip value and the formula for calculating profit or loss.
Calculating Pip Value
The pip value is the monetary value of a pip in the currency of your trading account. It is calculated by multiplying the pip value by the lot size and the exchange rate.
The formula for calculating pip value is:
Pip Value = (Pip in decimal places * Trade Size * Exchange Rate) / Account Currency Exchange Rate
For example, if you have a trading account denominated in USD, and you want to trade the EUR/USD currency pair, the exchange rate is 1.1234, and you want to trade 1 standard lot (100,000 units), the pip value will be:
Pip Value = (0.0001 * 100,000 * 1.1234) / 1 = $8.90
This means that for every pip movement in the EUR/USD currency pair, you will make or lose $8.90, depending on whether you are buying or selling.
Calculating Profit or Loss
To calculate your profit or loss, you need to subtract the opening price from the closing price and multiply the result by the pip value and the number of lots traded.
The formula for calculating profit or loss is:
Profit/Loss = (Closing Price – Opening Price) * Pip Value * Number of Lots
For example, if you bought the EUR/USD currency pair at 1.1234 and sold it at 1.1244, and you traded 1 standard lot, the profit or loss will be:
Profit/Loss = (1.1244 – 1.1234) * $8.90 * 1 = $8.90
This means that you made a profit of $8.90 on the trade.
However, if you sold the EUR/USD currency pair at 1.1234 and bought it back at 1.1244, the profit or loss will be:
Profit/Loss = (1.1234 – 1.1244) * $8.90 * 1 = -$8.90
This means that you made a loss of $8.90 on the trade.
Conclusion
Calculating forex gain or loss using pips is essential in determining your profitability in forex trading. Pips are used to measure the smallest possible price movement in a currency pair, and the pip value is the monetary value of a pip in the currency of your trading account. To calculate your profit or loss, you need to subtract the opening price from the closing price and multiply the result by the pip value and the number of lots traded. Understanding how to calculate forex gain or loss using pips can help you make informed trading decisions and manage your risk effectively.
