Forex trading is an exciting and lucrative business that involves buying and selling different currencies on the foreign exchange market. However, to succeed in forex trading, you need to have a good understanding of how to calculate profit per pip. In this article, we will explain what a pip is and how to calculate profit per pip in forex.
What is a Pip?
A pip is a unit of measurement used in forex trading to indicate the smallest possible price movement in a currency pair. Most currency pairs are quoted to four decimal places, except for the Japanese yen pairs, which are quoted to two decimal places. For example, if the EUR/USD pair is trading at 1.2000 and moves to 1.2001, this is a one-pip movement.
Calculating Profit per Pip
To calculate profit per pip, you need to understand the concept of lot size. A lot is the standard unit of measurement used in forex trading, and it represents the amount of currency that you are buying or selling. There are three main lot sizes in forex trading:
1. Standard Lot: A standard lot is equal to 100,000 units of the base currency.
2. Mini Lot: A mini lot is equal to 10,000 units of the base currency.
3. Micro Lot: A micro lot is equal to 1,000 units of the base currency.
To calculate profit per pip, you need to take into account the lot size, the pip value, and the exchange rate.
Step 1: Determine the Lot Size
The first step in calculating profit per pip is to determine the lot size of the trade. Let’s say you are trading a standard lot of EUR/USD, which is equal to 100,000 units of the base currency.
Step 2: Determine the Pip Value
The pip value is the amount of money that you will gain or lose for each pip movement in the currency pair. The pip value varies depending on the currency pair and the lot size. To calculate the pip value, you can use the following formula:
Pip Value = (One Pip / Exchange Rate) * Lot Size
For example, let’s say you are trading a standard lot of EUR/USD, and the exchange rate is 1.2000. The value of one pip for this trade is:
(0.0001 / 1.2000) * 100,000 = $8.33
Step 3: Calculate Profit per Pip
Once you have determined the pip value, you can calculate the profit per pip by multiplying the pip value by the number of pips gained or lost in the trade. For example, let’s say you bought EUR/USD at 1.2000 and sold it at 1.2010, which is a 10-pip gain. The profit per pip for this trade is:
$8.33 * 10 pips = $83.30
Conclusion
Calculating profit per pip is an essential skill in forex trading, as it helps you to understand the potential profits and losses of your trades. To calculate profit per pip, you need to determine the lot size, the pip value, and the exchange rate. By following these steps, you can calculate the profit per pip accurately and make informed trading decisions.
