Pips calculation in Forex
Pip is amongst the most basic yet confusing terms in the forex market. Doesn’t matter how many times you try to understand it, but some traders still struggle to calculate pip value.
Even some experienced traders also face problems in determining pip value. But not to worry. This blog will help you master the concept of pips calculation in forex with different real-life examples. So stay tuned.
Here's a quick look at what you'll read
Pips stands for percentage in point or price interest point in the forex market. Pips can be defined as the unit to measure the smallest change in the currency pair price movement.
The formula for calculating pips in forex:
Pip Value = (0.0001/Exchange Rate)* Currency Units
Pip is the fourth decimal place value in most currency pairs. Meanwhile, a pip is the second decimal place value in the Japanese Yen currency pair. That is 0.01.
One pip in forex is equal to one percent of one hundredth, that is,(1%*1/100 = 0.0001)
With a standard lot (100,000 units), generally, the profit is $10 per pip; with a mini lot (10,000 units), the profit is $1; and with a micro lot (1,000 units), the profit is around $0.10 per pip.
The pip value of one standard lot (100,000 units) is $1000 USD per pip; with a mini lot (10,000 units), the profit is $100 per pip, and with a micro lot (1,000 units) is $10 per pip.
What is a Pip?
Pips stands for percentage in point or price interest point in the forex market. Pips can be defined as the unit to measure the smallest change in the currency pair price movement.
Pip is the fourth decimal place value in most currency pairs. One pip in forex is equal to one percent of one hundredth, that is,(1%*1/100 = 0.0001) .
Meanwhile, a pip is the second decimal place value in the Japanese Yen currency pair. That is 0.01.
Pip is the key concept for calculating profit and loss while trading in currency pairs. Therefore, understanding pip calculation is a must for a forex trader.
How to calculate pips in forex
Pips calculation is quite simple; however, even after that, many forex traders face difficulty. So here are three examples of different currency pairs with different conditions and pip values. It will help you to master the concept effectively.
Non JPY Pair Pips Calculation
The pip calculation for the Non-JPY Pair is the same for all. So, let us take the GBP/USD pair. Suppose a trader opens a short position when the exchange rate is 1.2500.
The market moves in his or her favour, and the exchange rate drops to 1.2450. So the profit is around 50 pips (1.2500-1.2450 = 0.005 or 50 pips). In order to calculate pip profit from the trade, we need lot size.
With a standard lot (100,000 units), generally, the profit is $10 per pip; with a mini lot (10,000 units), the profit is $1; and with a micro lot (1,000 units), the profit is around $0.10 per pip.
In the above case, let us assume the trader trades with a standard lot. So the profit is around 500 USD (50 pips*10).
JPY Pair Pips Calculation
The pip calculation in forex for a pair with one currency, as a Japanese yen, is different. So, let us understand the USDJPY pip value calculation with examples.
Suppose a trader thinks the Japanese Yen is all set to strengthen against the USD. So, he or she decided to buy a mini lot for the pair at the rate 150.50.
However, the prediction went wrong, and the price reached 150.10. So here, the loss is around 40 pips (150.50-150.10 = 0.40 or 40 pips). It means 40 USD (40 pips*$1).
XAUUSD Pip Calculation
Traders generally get confused when calculating the pip value for trading in XAUUSD. So here is an example of pip calculation for gold trading.
Suppose a trader predicts that the gold price is all set to rise. So, he or she decided to buy gold at $2,235.25. The price moves in traders’ favour and rises to $2,235.75.
The gold moves 50 pips (2235.75-2235.25 = 0.50 or 50 pips). In the case of Gold, the pip value of one standard lot (100,000 units) is $1000 USD per pip; with a mini lot (10,000 units), the profit is $100 per pip, and with a micro lot (1,000 units) is $10 per pip.
Suppose the trader is trading with the micro lot size in the above case. The profit is 500 USD (50 pip* $10 = 500).
Pip Calculation Forex Formula
We have understood pip calculation in forex with three different examples and criteria. However, if you still struggle to calculate the pip value, then you can go for two options.
The above method and calculations are just to make you understand the core concept of pips. But you can calculate pip with just an easy formula. Here is how:
1 Pip in Forex = (0.0001/Exchange Rate)* Currency Units
Suppose EUR/USD is currently trading at 1.1500. The lot size is standard.
Pip value = (0.0001/1.1500)*100,000
= 8.69595
So, basically, in this case, you will either gain or lose 8.6595 EURO at every pip.
You can also avoid all the hustle of calculating pip value with the help of a pip calculator. Many trading platforms and forex brokers provide free pip calculators.
You just need to go to the Google search pip calculator and add trade information. The information may include currency pair, trade size, deposit currency, and pip amount.
Wrapping Up
Pip is among the most basic yet important concepts in the financial market. Knowledge of pips will help you in tracking your profit, loss, stop loss and other pivot information.
Beginners may find pips calculation in Forex complex at the start. However, it takes seconds to calculate once you get well-versed with the concept.
You can also go for tools or automated trading software for pip calculation. However, clear your basics first, as it will help you in planning, and executing your trade accordingly.