How to Calculate Forex Pips: A Beginner’s Guide
If you are new to the world of forex trading, you may have come across the term “pips” and wondered what it means. Pips are an essential part of forex trading as they are used to measure the price movement of currency pairs. Understanding how to calculate pips is crucial for any trader, whether you are a beginner or an experienced investor. In this article, we will provide you with a comprehensive guide on how to calculate forex pips.
What are Pips?
Before diving into the calculations, it’s important to understand what pips are. The term “pip” stands for “percentage in point,” and it is the smallest unit of price movement in the forex market. Pips are used to measure the change in value between two currencies in a currency pair. In most currency pairs, a pip is equivalent to 0.0001, except for pairs involving the Japanese yen, where a pip is equivalent to 0.01.
For example, in the EUR/USD currency pair, if the price moves from 1.1800 to 1.1801, it has moved one pip. Similarly, if the price moves from 110.00 to 110.01 in the USD/JPY currency pair, it has also moved one pip.
How to Calculate Pips?
To calculate the number of pips in a trade, you need to consider the decimal places in the currency pair’s price. Most currency pairs are quoted with four decimal places, except for the Japanese yen pairs, which are quoted with two decimal places.
To calculate the number of pips, you need to subtract the entry price from the exit price and multiply the result by the pip value.
Let’s consider an example:
Suppose you bought the EUR/USD currency pair at 1.1800 and sold it at 1.1850. To calculate the number of pips gained or lost, you subtract the entry price from the exit price:
1.1850 – 1.1800 = 0.0050
Since the EUR/USD is quoted with four decimal places, the pip value is 0.0001. To calculate the profit or loss in pips, you multiply the difference in price by the pip value:
0.0050 * 0.0001 = 0.0005
In this example, you gained 0.0005 pips or 5 pips.
Calculating Pips for JPY Pairs
As mentioned earlier, currency pairs involving the Japanese yen are quoted with two decimal places. To calculate the number of pips in JPY pairs, the process is slightly different.
Let’s consider an example:
Suppose you bought the USD/JPY currency pair at 110.00 and sold it at 110.50. To calculate the number of pips gained or lost, you subtract the entry price from the exit price:
110.50 – 110.00 = 0.50
Since the USD/JPY is quoted with two decimal places, the pip value is 0.01. To calculate the profit or loss in pips, you multiply the difference in price by the pip value:
0.50 * 0.01 = 0.0050
In this example, you gained 0.0050 pips or 50 pips.
Calculating Pip Value
Knowing how to calculate the number of pips is essential, but understanding the pip value is equally important. The pip value determines the monetary value of each pip and varies depending on the currency pair and the lot size traded.
To calculate the pip value, you need to divide the pip value of the currency pair by the exchange rate.
Let’s consider an example:
Suppose you are trading the EUR/USD currency pair and the pip value is 0.0001. If the exchange rate is 1.1850, the pip value in USD can be calculated as follows:
0.0001/1.1850 = 0.00008439
To calculate the pip value in your account currency, you need to multiply the pip value in USD by the exchange rate of your account currency.
For instance, if your account is denominated in GBP and the exchange rate is 1.3800, the pip value in GBP can be calculated as follows:
0.00008439 * 1.3800 = 0.00011648
In this example, the pip value for one standard lot (100,000 units) of the EUR/USD currency pair is approximately 0.00011648 GBP.
Conclusion
Understanding how to calculate forex pips is essential for every trader. Pips are used to measure the price movement in currency pairs, and calculating them accurately can help you determine your profit or loss. By following the steps outlined in this guide, you can calculate the number of pips gained or lost in a trade and determine their monetary value. Remember to consider the decimal places in the currency pair’s price and the pip value specific to each currency pair. Practice these calculations regularly, and you will gain a better understanding of how pips work in forex trading.
