The forex market is a global decentralized market where currencies are traded. It is the largest financial market in the world with an estimated daily turnover of $6.6 trillion as of 2019. As a forex trader, it is important to understand how to calculate the value of a pip in order to determine your potential profit or loss from a trade. In this article, we will discuss how to know how much each pip is worth in forex.
What is a Pip?
A pip (percentage in point) is the smallest unit of measurement in forex. It is used to measure the change in the value of a currency pair. The value of a pip varies depending on the currency pair being traded and the size of the trade.
For most currency pairs, a pip is equivalent to 0.0001 or 1/100th of a percent. For example, if the EUR/USD currency pair moves from 1.1000 to 1.1001, it has moved one pip. In some currency pairs, such as the USD/JPY, a pip is equivalent to 0.01 or 1/100th of a yen.
How to Calculate the Value of a Pip
The value of a pip is determined by the size of the trade and the exchange rate of the currency pair being traded. To calculate the value of a pip, you need to know the following:
– The currency pair being traded
– The exchange rate of the currency pair
– The size of the trade (in lots)
There are two main types of lots in forex trading: standard lots and mini lots. A standard lot is equivalent to 100,000 units of the base currency, while a mini lot is equivalent to 10,000 units of the base currency.
To calculate the value of a pip for a standard lot, you can use the following formula:
Value of a Pip = (0.0001 / Exchange Rate) x Lot Size
For example, let’s say you are trading the EUR/USD currency pair at an exchange rate of 1.1000 and you have a standard lot size of 1. The value of a pip would be:
Value of a Pip = (0.0001 / 1.1000) x 100,000 = $9.09
This means that for every pip the EUR/USD currency pair moves, you would make or lose $9.09.
To calculate the value of a pip for a mini lot, you can use the same formula but adjust the lot size:
Value of a Pip = (0.0001 / Exchange Rate) x (Lot Size / 10,000)
For example, let’s say you are trading the USD/JPY currency pair at an exchange rate of 110.00 and you have a mini lot size of 0.1. The value of a pip would be:
Value of a Pip = (0.01 / 110.00) x (10,000 / 1,000) = $0.91
This means that for every pip the USD/JPY currency pair moves, you would make or lose $0.91.
Calculating the Value of a Pip for Different Currency Pairs
The value of a pip can vary depending on the currency pair being traded. For example, the value of a pip for the EUR/USD currency pair is different from the value of a pip for the USD/JPY currency pair.
To calculate the value of a pip for different currency pairs, you need to know the exchange rate of the currency pair. The exchange rate is the value of one currency in relation to another currency.
For example, if the exchange rate of the USD/CAD currency pair is 1.2500, it means that one US dollar is worth 1.2500 Canadian dollars. If the exchange rate of the GBP/USD currency pair is 1.3000, it means that one British pound is worth 1.3000 US dollars.
To calculate the value of a pip for different currency pairs, you can use the same formula as above but substitute the exchange rate of the currency pair:
Value of a Pip = (0.0001 / Exchange Rate) x Lot Size
For example, let’s say you are trading the USD/CAD currency pair at an exchange rate of 1.2500 and you have a standard lot size of 1. The value of a pip would be:
Value of a Pip = (0.0001 / 1.2500) x 100,000 = $8.00
This means that for every pip the USD/CAD currency pair moves, you would make or lose $8.00.
Conclusion
Knowing how to calculate the value of a pip is essential for forex traders to determine their potential profit or loss from a trade. The value of a pip varies depending on the currency pair being traded and the size of the trade. By using the formula above, traders can calculate the value of a pip for different currency pairs and lot sizes. It is important to note that the value of a pip can change based on market conditions, such as volatility and liquidity. Therefore, it is important for traders to understand the risks involved in forex trading and to always use proper risk management techniques.
