Forex trading is a popular investment option for many people around the world. It involves buying and selling foreign currencies in the hope of making a profit. One of the key concepts in forex trading is the pip value. This refers to the smallest unit of measurement in forex trading and is used to determine the profit or loss of a trade. In this article, we will explain in detail how to work out forex pip value.
What is a pip?
A pip, also known as a point, is the smallest unit of measurement in forex trading. It is used to measure the change in the exchange rate of a currency pair. For most currency pairs, a pip is equal to 0.0001, or one-hundredth of a percent. However, for some currency pairs, a pip is equal to 0.01.
For example, if the EUR/USD exchange rate changes from 1.1000 to 1.1001, it is a one-pip movement. Similarly, if the USD/JPY exchange rate changes from 108.50 to 108.51, it is a one-pip movement.
Why is pip value important?
The pip value is important in forex trading because it is used to calculate the profit or loss of a trade. The profit or loss of a trade is determined by the number of pips gained or lost, multiplied by the pip value.
For example, if you buy 1 lot of EUR/USD at 1.1000 and sell it at 1.1100, you have gained 100 pips. If the pip value is $10 for this currency pair, your profit would be $1,000 (100 pips x $10).
How to work out pip value?
To work out the pip value, you need to know the following information:
– The currency pair you are trading
– The exchange rate of the currency pair
– The lot size of the trade
Once you have this information, you can use the following formula to calculate the pip value:
Pip value = (0.0001 / exchange rate) x lot size
For example, let’s say you are trading 1 lot of EUR/USD at an exchange rate of 1.1000. The pip value would be:
Pip value = (0.0001 / 1.1000) x 100,000
Pip value = $9.09
This means that for every pip gained or lost in this trade, you would make or lose $9.09.
If you are trading a currency pair where the pip value is 0.01, the formula would be slightly different:
Pip value = (0.01 / exchange rate) x lot size
For example, if you are trading 1 lot of USD/JPY at an exchange rate of 108.50, the pip value would be:
Pip value = (0.01 / 108.50) x 100,000
Pip value = $9.21
This means that for every pip gained or lost in this trade, you would make or lose $9.21.
Conclusion
Working out the pip value is an important part of forex trading. It helps you to calculate the potential profit or loss of a trade and make informed trading decisions. By following the formula outlined in this article, you can easily calculate the pip value for any currency pair and lot size. Always remember to take into account the spread, which is the difference between the bid and ask price, as this will affect the overall profit or loss of your trade.
