Forex trading is all about making profits by buying and selling currencies. As a forex trader, one needs to be familiar with various trading terminologies, including PIP. PIP stands for “Percentage in Point” or sometimes referred to as “Price Interest Point.” It is the smallest unit of measurement used to denote changes in currency prices in forex trading. In this article, we’ll take a closer look at how to calculate PIP in forex trading, step by step.
Step 1: Understand the PIP value of the currency pair
The first step in calculating PIP is to understand the PIP value of the currency pair being traded. PIP value varies from one currency pair to another, and it is determined by the currency base. For example, in the EUR/USD currency pair, the base currency is the euro, and the PIP value is $0.0001. This means that when the EUR/USD price moves up or down by one PIP, the value of the currency pair changes by $0.0001.
Step 2: Determine the lot size of the trade
The second step is to determine the lot size of the trade. A lot size is the number of units of a currency pair that a trader buys or sells. Lot sizes are usually expressed in standard, mini, or micro lots. A standard lot is 100,000 units, a mini lot is 10,000 units, and a micro lot is 1,000 units.
Step 3: Calculate the PIP value per lot size
Once you have determined the lot size, the next step is to calculate the PIP value per lot size. To do this, you need to multiply the PIP value of the currency pair by the lot size. For example, if you’re trading the EUR/USD currency pair with a standard lot size of 100,000 units, the PIP value per lot size would be $10 (0.0001 x 100,000).
Step 4: Calculate the PIP movement
The fourth step is to calculate the PIP movement. This refers to the change in the currency pair’s price that results in a one PIP change. To calculate the PIP movement, you need to divide the difference in the bid and ask price by the number of PIPs. For example, if the bid price of the EUR/USD currency pair is 1.1205, and the ask price is 1.1207, the difference between the two prices is 0.0002. If we divide this by the PIP value of 0.0001, we get a PIP movement of 2.
Step 5: Calculate the profit or loss
The final step is to calculate the profit or loss. To do this, you need to multiply the PIP value per lot size by the number of PIPs gained or lost in the trade. For example, if you bought the EUR/USD currency pair at 1.1205 and sold it at 1.1207, you would have gained 2 PIPs. If you were trading a standard lot size of 100,000 units, your profit would be $20 (2 x $10).
Conclusion
Calculating PIP is a crucial aspect of forex trading. It helps traders to determine their potential profits or losses before entering a trade. Understanding how to calculate PIP can also help traders to manage their risk and make informed trading decisions. By following the steps outlined in this article, traders can calculate PIP with ease and trade the forex market with confidence.
