In the world of forex trading, one of the most important concepts to understand is the calculation of pips value. Pips, which stands for “percentage in point,” are the smallest unit of measurement used in forex trading. They represent the change in price of a currency pair, and are used to determine the profit or loss on a trade.
Calculating the value of pips is essential for traders to make informed decisions about their trades. In this article, we will discuss how to calculate pips value in forex.
What are Pips?
A pip is the smallest unit of measurement in the forex market. It is the fourth decimal place in a currency pair, except for currency pairs that involve the Japanese yen, which are quoted to the second decimal place.
For example, let’s say that the EUR/USD currency pair is trading at 1.1234. If the price moves up to 1.1235, that is a one-pip increase. If the price moves down to 1.1233, that is a one-pip decrease.
The value of a pip is determined by the currency pair being traded, the size of the trade, and the exchange rate at the time of the trade. Each currency has its own pip value, and it is important for traders to understand how to calculate it.
Calculating Pip Value
To calculate the value of a pip, traders need to know three things: the currency pair being traded, the size of the trade, and the exchange rate at the time of the trade.
Let’s say a trader is trading the EUR/USD currency pair, and they have a position size of 10,000 units. The exchange rate is currently 1.1234. To calculate the pip value, the trader would use the following formula:
Pip Value = (0.0001 / Exchange Rate) x Position Size
In this case, the pip value would be:
Pip Value = (0.0001 / 1.1234) x 10,000 = $0.89
So, for every one-pip move in the EUR/USD currency pair, the trader would earn or lose $0.89, depending on the direction of the trade.
Calculating Pip Value for Different Currency Pairs
The pip value for different currency pairs can vary, depending on the exchange rate and the size of the trade. Traders can use the same formula to calculate the pip value for any currency pair, as long as they know the exchange rate and the position size.
For example, let’s say a trader is trading the GBP/USD currency pair, and they have a position size of 20,000 units. The exchange rate is currently 1.2345. To calculate the pip value, the trader would use the following formula:
Pip Value = (0.0001 / Exchange Rate) x Position Size
Pip Value = (0.0001 / 1.2345) x 20,000 = $1.62
So, for every one-pip move in the GBP/USD currency pair, the trader would earn or lose $1.62, depending on the direction of the trade.
Calculating Pip Value for Different Position Sizes
The pip value can also vary depending on the size of the trade. The formula for calculating pip value remains the same, but the position size is what changes.
For example, let’s say a trader is trading the USD/JPY currency pair, and they have a position size of 50,000 units. The exchange rate is currently 109.50. To calculate the pip value, the trader would use the following formula:
Pip Value = (0.01 / Exchange Rate) x Position Size
Pip Value = (0.01 / 109.50) x 50,000 = $4.56
So, for every one-pip move in the USD/JPY currency pair, the trader would earn or lose $4.56, depending on the direction of the trade.
Conclusion
Calculating the pip value is an essential part of forex trading. It allows traders to understand the potential profit or loss of a trade, and to make informed decisions about their trades. By using the formula for calculating pip value, traders can determine the value of pips for any currency pair and any position size, and can use this information to manage their trades effectively.
