Forex trading is all about making profits, and understanding how to calculate the value per pip is a crucial aspect of this. The value per pip is the amount of money you earn or lose for each pip movement in the exchange rate of a currency pair. In other words, it is the value of a pip in your account currency. This value varies depending on the currency pair, the lot size, and the exchange rate. In this article, we will explain how to calculate the value per pip in forex trading.
What is a pip?
A pip stands for “percentage in point” and is the smallest unit of measurement for currency movements. It represents the fourth decimal place in a currency pair, except for the Japanese yen, where it represents the second decimal place. For example, if the EUR/USD exchange rate moves from 1.2000 to 1.2010, it has moved 10 pips.
Calculating the value per pip:
To calculate the value per pip, you need to know the following:
– The currency pair you are trading
– The exchange rate of the currency pair
– The lot size of your trade
– The currency of your account
The formula for calculating the value per pip is:
Value per pip = (pip value in quote currency / exchange rate) * lot size
Let’s break down this formula:
1. Pip value in quote currency: The pip value in the quote currency is the value of one pip in the currency that is listed second in the currency pair. For example, in the EUR/USD currency pair, the quote currency is the USD. The pip value for one standard lot (100,000 units) of EUR/USD is $10. So, the pip value in this case is $10.
2. Exchange rate: The exchange rate is the value of one currency relative to another. For example, if the EUR/USD exchange rate is 1.2000, it means that 1 euro is worth 1.2000 US dollars.
3. Lot size: The lot size is the number of units of currency you are trading. There are three types of lot sizes: standard, mini, and micro. A standard lot is 100,000 units, a mini lot is 10,000 units, and a micro lot is 1,000 units.
4. Currency of your account: The currency of your account is the currency in which your trading account is denominated. For example, if your account is denominated in USD, then your account currency is USD.
Let’s use an example to illustrate how to calculate the value per pip:
Suppose you are trading the EUR/USD currency pair with a mini lot size of 10,000 units, and the exchange rate is 1.2000. Your account currency is USD.
Step 1: Determine the pip value in the quote currency
The pip value for one standard lot of EUR/USD is $10. Since you are trading a mini lot, the pip value is 1/10th of the standard lot, which is $1.
Step 2: Convert the pip value to your account currency
To convert the pip value to your account currency, you need to divide the pip value by the exchange rate:
$1 / 1.2000 = $0.83
So, the pip value in USD is $0.83.
Step 3: Calculate the value per pip
To calculate the value per pip, you need to multiply the pip value in USD by the lot size:
$0.83 * 10,000 = $8.30
So, the value per pip in this trade is $8.30.
Conclusion:
Calculating the value per pip is an essential skill for forex traders. It allows you to understand the potential profit or loss of a trade and helps you to manage your risk effectively. By using the formula outlined in this article, you can calculate the value per pip for any currency pair, lot size, and account currency. Remember that the value per pip will vary depending on market conditions, such as volatility and liquidity, so it’s essential to stay up-to-date with market news and events.
