Forex traders use pips to measure the price movement of currency pairs. A pip is the smallest unit of measurement in forex trading and represents the fourth decimal point in most currency pairs. Calculating pip value is an essential skill for forex traders, as it helps them determine their profit or loss on a trade. In this article, we will explain how to calculate pip value in forex.
What is a pip?
A pip is a unit of measurement used in forex trading to calculate the movement of currency pairs. It stands for “percentage in point” or “price interest point.” In most currency pairs, a pip is represented as the fourth decimal point. For example, if the EUR/USD currency pair moves from 1.2345 to 1.2346, it has moved one pip.
Calculating pip value
To calculate the pip value of a currency pair, you need to know the following:
1. The size of the position (lot size)
2. The current exchange rate of the currency pair
3. The quote currency of the currency pair
Once you have this information, you can use the following formula to calculate the pip value:
Pip value = (1 pip / exchange rate) x lot size x quote currency
Let’s break down this formula further:
1. 1 pip / exchange rate: This gives you the value of one pip in the base currency of the currency pair. For example, if the exchange rate of the EUR/USD currency pair is 1.2345, the value of one pip in euros would be 0.000081.
2. Lot size: This refers to the size of your position in the currency pair. In forex trading, lot sizes are typically expressed in units of 1,000, 10,000, or 100,000. For example, if you have a position size of 10,000 units of the EUR/USD currency pair, your lot size would be 0.1.
3. Quote currency: This is the second currency in the currency pair. For example, in the EUR/USD currency pair, the quote currency is the US dollar.
Let’s look at an example to see how this formula works:
Suppose you have a position size of 10,000 units of the EUR/USD currency pair, and the current exchange rate is 1.2345. The quote currency is the US dollar.
Pip value = (1 pip / 1.2345) x 0.1 x USD
= 0.000081 x 10,000 x USD
= USD 0.81 per pip
This means that for every pip that the EUR/USD currency pair moves, your profit or loss will be USD 0.81.
Calculating pip value for different lot sizes
The above example assumes a position size of 10,000 units of the currency pair. However, forex traders can also have different lot sizes, such as 1,000 units or 100,000 units. To calculate pip value for different lot sizes, you need to adjust the lot size in the formula.
For example, if you have a position size of 1,000 units of the EUR/USD currency pair, the lot size would be 0.01. Using the same exchange rate and quote currency as in the previous example, the pip value would be:
Pip value = (1 pip / 1.2345) x 0.01 x USD
= 0.000081 x 1,000 x USD
= USD 0.08 per pip
Similarly, if you have a position size of 100,000 units of the EUR/USD currency pair, the lot size would be 1. Using the same exchange rate and quote currency as in the previous example, the pip value would be:
Pip value = (1 pip / 1.2345) x 1 x USD
= 0.000081 x 100,000 x USD
= USD 8.10 per pip
Conclusion
Calculating pip value is an essential skill for forex traders, as it helps them determine their profit or loss on a trade. To calculate pip value, you need to know the size of your position, the current exchange rate of the currency pair, and the quote currency of the currency pair. By using the formula (1 pip / exchange rate) x lot size x quote currency, you can calculate the pip value for different lot sizes. With this knowledge, you can make informed trading decisions and manage your risk effectively.
