Forex trading has become one of the most popular investment options in recent times. It is a decentralized market where traders can buy or sell currencies from all over the world, based on their economic and political conditions. The value of a currency pair is measured in pips (percentage in point). Pips are the smallest increment by which a currency pair can change in value. In this article, we will discuss the worth of every pip in forex trading.
Understanding Pips
Pips are the measurement of the smallest price movement in a currency pair. It is calculated by the fourth decimal place in most currency pairs. For example, if the EUR/USD moves from 1.1100 to 1.1101, the change in value is 1 pip. However, there are some exceptions where the pip is calculated by the second decimal place, such as the Japanese yen.
The value of each pip depends on the currency pair and the size of the trade. In general, the pip value is determined by the exchange rate of the currency pair and the size of the position. The value of each pip is different for each currency pair, and it also changes with the fluctuations in the exchange rate.
Calculating Pip Value
Pip value is an essential concept for forex traders as it helps them to determine the potential profit or loss from a trade. To calculate the pip value, traders need to know the exchange rate of the currency pair, the lot size of the trade, and the currency of their trading account.
Let’s take an example to understand the calculation of pip value. Suppose a trader has a trading account in USD, and he wants to trade EUR/USD with a lot size of 1. The exchange rate of EUR/USD is 1.1200. The pip value can be calculated as follows:
Pip value = (0.0001 ÷ exchange rate) x lot size x base currency
= (0.0001 ÷ 1.1200) x 100,000 x USD
= $8.93
This means that for a lot size of 1, the value of each pip in the EUR/USD currency pair is $8.93. If the trader buys a lot of EUR/USD and the price moves up by 10 pips, the profit will be $89.30 (10 pips x $8.93).
Factors Affecting Pip Value
The pip value is not constant and can change with the fluctuations in the exchange rate. The pip value can also vary based on the currency of the trading account, the lot size of the trade, and the currency pair being traded.
Currency of Trading Account
The pip value depends on the currency of the trading account. If the trading account is denominated in USD, the pip value for all currency pairs will be calculated in USD. If the trading account is denominated in a different currency, the pip value will be converted into that currency.
Lot Size
The lot size also affects the pip value. A lot is a standard unit of measurement in forex trading, and it varies from broker to broker. The standard lot size is 100,000 units of the base currency. However, there are other lot sizes available, such as mini lots (10,000 units) and micro lots (1,000 units). The pip value increases or decreases with the lot size.
Currency Pair
The pip value also depends on the currency pair being traded. The pip value for a currency pair with a higher exchange rate will be higher than the pip value for a currency pair with a lower exchange rate. For example, the pip value for the EUR/USD currency pair is higher than the pip value for the USD/JPY currency pair.
Conclusion
In conclusion, pip value is an essential concept to understand for forex traders. It helps traders to determine the potential profit or loss from a trade. The pip value depends on the currency of the trading account, the lot size of the trade, and the currency pair being traded. The pip value can also fluctuate with the exchange rate of the currency pair. Therefore, traders must have a proper understanding of pip value to make informed trading decisions.
