How to calculate forex pips? Are you finding answer for this particular question? Well, if you are, no need to be worried. We are going to explain everything you need to know about pips in forex trading. For beginner traders, knowing about pips is essential because, its the primary element of forex trading. Without further due, let’s begin the explanation.
One of the essential factors of forex trading is Pip. Pip stands for percentage in point or price. Pip is the smallest value that can change in a currency price quote, which determines the differences between the price of currencies in a currency pair.
Calculating the pip value for a forex trader is like reading the fortune. Through this calculation and assuming the change in Pip value, a trader takes his or her next step and set a goal. And if you are wondering how to calculate forex Pip, then this article is written for you.
Understand Pips in Forex Trading
Pip is 1/100th of one percent because the currency value of currency pairs in forex are generally quoted to the 4th decimal place, although Japanese currency is quoted in 2 decimal places. A pip is the smallest amount and a standardized unit which changes the currency quote. This standardized quantity helps to protect traders from immense losses.
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For example, if a pip were ten basis points, a one-pip change would cause higher volatility in currency values. The value of Pip is vital because it affects risk. Without knowing the pip value, you can’t accurately estimate the total size of the position of trade and may end up risking too much or too little on a trade.
How to Calculate Forex Pips
If a trader wants to buy USD/CAD currency pair, and the price quote of USD/CAD is 1.1005, later the price changed to 1.1006, which means the price of USD appreciated compare to CAD dollar by one Pip. So one Pip is 0.0001 in case of USD as a base currency.
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Determine the Pip Size
Traders calculate pip value by multiplying one Pip (0.0001) by the particular lot/contract size. For standard lots, this requires 100,000 units of the base currency and 10,000 units for mini lots. For instance, looking at EUR/USD, a one pip movement in a standard contract is equal to $10 (0.0001 x 100 000).
To be more precise
The calculation of One Pip value for currency pair EUR/USD by a standard size lot will be:
- Pip Value = Contract Size x One Pip
- Pip Value = 100,000 x 0.0001
- Pip Value = $10
In the same way, the calculation for one Pip value for EUR/USD by mini size lot will be:
- Pip Value = Contract Size x One Pip
- Pip Value = 10,000 x 0.0001
- Pip Value = $1
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Determine the Exchange Rate
If the basis of your account is in British Pounds (GBP), you must convert that $1 into British Pounds. To find this conversion, divide $1 by the current GBP/USD exchange rate, which is at 1.2863 USD, which means for 1.2863 USD, you can buy 1 GDP. It is necessary to divide it here because the British pound cost is higher than U.S. dollars. 1 divided by 1.2863 is 0.7774 Pounds.
N.B – If you want to know exactly how to calculate forex pips in the most effective way, you must understand the exchange rate and the possibilities. Depending on the exchange rate, the value of pip is decided.
Use the Formula
The formula for calculating the Pip Value is simple
he fundamental formula for calculating pip value in the quote —the one on the right:
0.0001 is the value of one Pip per lot, or 0.01 if the currency is JPY
Divided by the exchange rate multiplied by the lot size (in base currency)
(1 pip/exchange rate or price of the pair) lot size [in base currency—the one on the left] pip value in the quote currency [the one on the right]
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Complete the Conversion Process
Assuming a standard 100,000 lot size, and EUR/USD price of 1.4000, account denominated in USD:
(0.0001/1.4000)x100,000 =$7.14 pip for a standard lot ($0.74 / pip for a mini lot, $0.074 pip for a micro lot)
If you are trading three lots, each Pip would be worth three times that amount. If the denomination of your account is in USD, then there is nothing else to do.
If it is in EUR or JPY, you must convert the $7.14 into that currency.
For instance, if the denomination of your account is in EUR, then:
$7.1X1.4000 per Euro = €10.00 pip /standard lot
€1.00 pip mini lot
€0.1000 per micro lot.
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Pip Value Calculation Example
Suppose you are a forex trader, and you took your decision to trade with currency pair USD/CAD. And then, you found out that the quote of your currency pair USD/CAD is 1.1005. Now you decided to buy a lot worth 10,000 CAD. Using (1/1.1005×10,000) this equation, you calculated the price of 10,000 CAD is 9086.78 USD. So you have to pay 9086.78 USD to buy 10,000 CAD.
Sometimes later, you observed that the pair quote became 1.1006. It increased by 1 Pip. That means the price of USD appreciated relative to CAD. Now the rate of 10,000 CAD is 9085.95. So the difference in cost in USD is 9088.76-9085.95, which is 0.83, which is 83 cents. Now 83 cents may sound very low, but when the leverage is 100 times, then that 1 Pip is 83 USD.
Now currencies can q move 70 pips in a day, that means even if you have a lot of 10,000 CAD at 100 times leverage, you may make a profit or loss of 6000 CAD.
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A Short Cut to Calculate Pip Value
If the denomination of your account is in the currency in the counterpart of a currency pair; then, you have an easy way out to calculate the Pip value quickly.
Whether you are trading a standard, micro, or mini lot, then 10, 0.10, or 1 will be the fixed value as per the position of that pair.
For example, the denomination of your trading account is in USD. And in your currency pair, USD is the counter currency, such as GBP/USD, EURUSD, NZD/USD or AUD/USD, 0.10$ will be the Pip value
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In a lot of 1,000 currency units, the pip value will be 0.10$ which is a micro lot
In a lot of 10,000 currency units, Pip value will be 1$ which is a mini lot
In a lot of 100,000 currency units, Pip value will be 10$ which is a standard lot
To determine the value of Pip when the base of a currency pair is U.S dollar, such as USD/EUR, USD/CAD or USD/JPY, for an account with U.S. dollars as denominated currency:
divide the regular values of Pip each lot (that are listed-above) by the applicable rate of exchange.
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Suppose, you are going to trade a $100,000 standard lot with the pair, which is USD/CAD, then you divide 10USD as it is your standard Pip value per Standard lot by the rate of exchange of currency pair USD/CAD. If the currency pair USD/CAD is trading at 1.3410, then the appropriate value of Pip will be 10 divided by 1.3410 = 7.4571 USD per standard lot when trading with U.S dollars as the account’s currency of denomination.
Final Words on Calculating Pips in Forex Trading
Now you probably have all the necessary information about and know how to calculate forex pips. So if you are planning to become a forex trader, be ready to calculate your Pip value and decide whether to buy or sell to make a profit. A good trader is always open to knowledge and information about the trade. In this case, it is the same.