Forex trading is an exciting and rewarding venture that has become a popular way for people to earn extra income or even make a living. One of the key concepts in forex trading is the calculation of pips. Pips are the smallest unit of measurement in the forex market and are used to determine the price movement of currency pairs. In this article, we will discuss how to calculate forex pips for the EUR/USD currency pair.
What are pips?
A pip is a unit of measurement that represents the smallest price movement of a currency pair. It is the fourth decimal place in most currency pairs, except for the Japanese yen, where it is the second decimal place. A pip is short for “percentage in point” or “price interest point.” It is the smallest amount by which a currency pair can change in value.
For example, if the EUR/USD currency pair moves from 1.1300 to 1.1305, then it has moved five pips. If it moves from 1.1300 to 1.1295, then it has moved five pips in the opposite direction.
How to calculate forex pips for the EUR/USD currency pair
Calculating pips for the EUR/USD currency pair is a simple process. It involves three steps:
Step 1: Determine the pip value in your trading account currency
The pip value is the amount of money that one pip represents in your trading account currency. This value varies depending on the currency pair, the lot size, and the exchange rate of your trading account currency.
To determine the pip value, you need to know the following:
– The currency pair you are trading
– The exchange rate of your trading account currency
– The lot size of your trade
For example, let’s say you are trading the EUR/USD currency pair with a lot size of 0.01 and your trading account currency is USD. The exchange rate of USD/EUR is 0.85.
To calculate the pip value, you can use the following formula:
Pip value = (0.0001 / exchange rate) x lot size x base currency
In this example, the base currency is EUR.
Pip value = (0.0001 / 0.85) x 0.01 x EUR
Pip value = 0.00011764 x EUR
Step 2: Calculate the number of pips
Once you have determined the pip value, you can calculate the number of pips by subtracting the entry price from the exit price and dividing the result by the pip size.
For example, let’s say you entered a long position on the EUR/USD currency pair at 1.1300 and exited at 1.1350.
Number of pips = (exit price – entry price) / pip size
Pip size for EUR/USD = 0.0001
Number of pips = (1.1350 – 1.1300) / 0.0001
Number of pips = 50 pips
Step 3: Calculate the profit or loss
Finally, you can calculate the profit or loss of your trade by multiplying the number of pips by the pip value and the lot size.
For example, let’s say you traded 0.01 lots and made 50 pips on the EUR/USD currency pair.
Profit/loss = number of pips x pip value x lot size
Profit/loss = 50 x 0.00011764 x 0.01
Profit/loss = $0.0588
This means that you made a profit of $0.0588 on your trade.
Conclusion
Calculating forex pips is a crucial part of trading. It helps you to determine the profit or loss of your trades and to manage your risk effectively. By following the three steps outlined above, you can easily calculate pips for the EUR/USD currency pair and determine your potential profit or loss. Remember to always trade with caution, manage your risk effectively, and use proper risk management strategies to minimize losses and maximize profits.
