Calculating profits and losses in forex trading can be a daunting task for beginners. However, understanding how to calculate the amount of pips made or lost on standard lot forex is essential to assess profitability and risk. In this article, we will provide a step-by-step guide on how to calculate pips in forex trading.
What is a Pip?
A pip, short for percentage in point, is the smallest unit of price movement in forex trading. It represents the fourth decimal place in the exchange rate for most currency pairs. For example, if the EUR/USD exchange rate moves from 1.1200 to 1.1201, it has increased by one pip.
The value of a pip depends on the lot size of the trade and the currency pair being traded. In the case of a standard lot, which is equivalent to 100,000 units of the base currency, a pip is worth $10 for most currency pairs. However, for currency pairs that have the Japanese yen as the base currency, a pip is worth $8.33 due to the lower value of the yen.
How to Calculate Pips on Standard Lot Forex
To calculate the amount of pips made or lost on a standard lot forex trade, follow these steps:
Step 1: Determine the currency pair being traded
The first step is to identify the currency pair being traded. Let’s use the EUR/USD as an example.
Step 2: Identify the exchange rate
The second step is to identify the exchange rate at the time of opening the trade. Let’s assume the EUR/USD exchange rate was 1.1200.
Step 3: Determine the direction of the trade
The third step is to determine the direction of the trade, whether it is a buy (long) or sell (short) position. Let’s assume we bought the EUR/USD at 1.1200.
Step 4: Determine the closing exchange rate
The fourth step is to determine the closing exchange rate at the time of closing the trade. Let’s assume the closing exchange rate was 1.1300.
Step 5: Calculate the difference in pips
The fifth step is to calculate the difference in pips between the opening and closing exchange rates. We do this by subtracting the opening exchange rate from the closing exchange rate and multiplying the result by 10. In this case, the difference in pips is:
(1.1300 – 1.1200) x 10 = 100 pips
Step 6: Determine the profit or loss
The final step is to determine the profit or loss in dollars. We do this by multiplying the difference in pips by the value of one pip, which is $10 for most currency pairs. In this case, the profit is:
100 pips x $10 = $1,000
If the trade was a sell (short) position, we would have subtracted the closing exchange rate from the opening exchange rate and multiplied the result by 10. The profit or loss calculation would also have been different.
Conclusion
Calculating the amount of pips made or lost on standard lot forex trades is crucial to assess profitability and risk. By following the steps outlined in this article, traders can calculate their profits or losses accurately. However, it is essential to remember that forex trading involves a significant amount of risk, and traders should always use proper risk management techniques.
