Forex trading is a lucrative business that has been gaining massive popularity over the years. As a beginner, understanding the trading terminologies is essential in making profitable trades. One of the most important terms that you must comprehend is the pip. Pip stands for percentage in point, and it is the smallest unit of measurement for currency movements in forex trading. It is used to calculate profits and losses and is an essential aspect of forex trading. In this article, we will explain how pip is calculated in forex.
What is a Pip?
A pip is a unit of measurement used to calculate the change in value of a currency pair in forex trading. It is the fourth decimal place in a currency pair, except for the Japanese yen, where it is the second decimal place. For instance, if the EUR/USD currency pair moves from 1.2000 to 1.2010, it means it has moved ten pips.
Pip Value
The pip value is the value of one pip in the currency of your trading account. It is used to calculate the profit or loss of a trade. The pip value is dependent on the currency pair being traded and the size of the trade.
To calculate the pip value, you need to know the following:
– The currency pair being traded
– The size of the trade
– The exchange rate of the currency pair
The formula for calculating the pip value is as follows:
Pip Value = (1 Pip / Exchange Rate) * Lot Size
For example, if you are trading the EUR/USD and the exchange rate is 1.2000, and you have a standard lot size of 100,000, the pip value will be calculated as follows:
Pip Value = (0.0001 / 1.2000) * 100,000 = $8.33
In this instance, one pip is equal to $8.33. Therefore, if the EUR/USD moves ten pips in your favor, you will make a profit of $83.30.
Calculating Profit and Loss
Calculating profit and loss is an essential aspect of forex trading. To calculate your profit or loss, you need to know the following:
– The currency pair being traded
– The size of the trade
– The entry price of the trade
– The exit price of the trade
The formula for calculating profit and loss is as follows:
Profit/Loss = (Exit Price – Entry Price) * Lot Size * Pip Value
For example, if you are trading the EUR/USD and you have a standard lot size of 100,000, and the exchange rate is 1.2000, and you enter a long trade at 1.2000 and exit the trade at 1.2020, your profit will be calculated as follows:
Profit = (1.2020 – 1.2000) * 100,000 * $8.33
Profit = 0.0020 * 100,000 * $8.33
Profit = $166.60
In this instance, you would make a profit of $166.60.
Conclusion
Understanding how pip is calculated in forex trading is essential in making profitable trades. Pips are the smallest unit of measurement used to calculate the change in value of currency pairs. The pip value is the value of one pip in the currency of your trading account and is used to calculate profits and losses. Calculating profit and loss is vital in forex trading, and it is calculated using the entry and exit price of a trade, lot size, and pip value. By understanding how pips are calculated, you can make informed decisions when trading forex.
