What is pip and how to calculate its value?

What is pip and how to calculate its value?

Forex

In simple terms, the profit made by a forex trader is in the movement of the pip. So it is only logical that you know enough about pip and how you can calculate it to make your profit from a trade. Nevertheless, it can be a confusing topic to understand sometimes. For a beginner trader seeking inquiries about pip value, how to calculate pip value or any information on pip, this is your long awaited article. This article will teach you all you need to know about pip.

What is the meaning of PIP in FOREX ?

What is pip? Pip is simply the unit of measurement for currency movement.  The fourth decimal place in any currency pair is called pip.  For instance, let’s say the EUR/USD pair moves from 1.1161 to 1.1163. This will be two pips movement. The number on the fourth decimal is what is called pip. In this case, it’s 1 and 3. Most brokers also provide five decimal place figures. The fifth decimal place figure is called a half pip. For example 1.23341. In this case, four is the pip and 1 is the half pip. How much profit or loss you will make on a pip of movement actually depends on the type of security you are trading on.

What are pipettes? A pipette is a one-tenth of a pip. The pipette was invented due to the need for accuracy for the slightest move in a currency.

How are pips calculated?

To calculate pips value, it depends on the currency of the account you are using and the position of the currency in question.

How to calculate pip value when trading a USD account.

Currency pairs involving the USD are the most traded pairs in the world and as such, it is important that you know to calculate the pip value when trading on the USD. When the USD is listed second in a currency pair, the pip value is usually fixed. It doesn’t change assuming you are trading with a USD account.

These are the fixed pip amounts.

  • 100,000 worth of currency is equivalent to $10 for a standard lot
  • 10,000 worth of currency is equivalent to $1 for a mini lot
  • 1,000 worth of currency is equivalent to $0.10 for a micro lot.

These fixed values are applicable to any currency pair that has the USD listed second. These include NZD/USD, EUR/USD, AUD/USD and GBP/USD.

For currency pairs involving the USD but listed as the first pair, you divide the pip value by the rate value of the currency pair. For example, let’s say the rate value for USD/CAD is 1.2456. To calculate the pip value assuming you are trading with a USD account, you divide $10 by 1.2456.

How to calculate pip value for a non-USD account.

Regardless of the type of currency the account is denominated in, as long as it is listed second in a currency pair, its value is fixed. Using the Canadian dollar as an example, any currency pair such as USD/CAD which has the CAD as the secondary currency has a fixed pip value. CAD$10 for a standard lot, CAD$1 for a mini lot, CAD$0.10 for a micro lot.

In currency pairs where the CAD is listed second, divide the pip value by the exchange rate value. For example, if the rate for CAD/CHF is 1.6543. Then you divide CAD$10 by 1.6543. This value will be for the standard lot.

For currency pairs involving both the CAD and the Japanese yen (JPY), you multiply the resultant by 10. For example, if the rate value for CAD/ JPN is 140.00. In this scenario, the CAD comes first on the pair so you divide CAD$10 by 140.00. You then multiply the resultant by 10 because the currency pair involves the Japanese yen (JPY).

How to calculate the pip value for other currency pairs

In a situation where you want to trade on a currency pair that does not contain currency your account is denominated there is completely different calculation applied. How do you make the calculation for pip value? An example of such currency pair is EUR/GBP.

In this case, the value of the second currency is always fixed if the person had an amount in the said currency.  For instance, if the trader held GBP, then the pip value for EUR/GBP is GBP10 for a standard lot as discussed above. What follows next is how to convert GBP10 to our own currency. If our account is in say USD, we will divide GBP10 by the rate for USD/GBP. Which will give USD$13.16.

In a situation where you have a backward quote say GBP/USD with its rate 1.3163, then divide one by the rate and that will give you 0.7600. This will be the USD/GBP rate. After that you perform the calculation according  to the instruction above.

In another instance where the account currency is in EUR, but you want to find the pip value for AUD/CAD currency pair, remember that in the previous lessons above, the standard lot for this pair for a person with CAD standard account is CAD$10. You then divide the CAD$10 by the EUR/CAD rate in other to convert CAD into euro.

Conclusion

Always look for the currency that is providing the pip value. Once you know which currency (YYY) it is, you then divide (XXX/YYY) in other to convert the fixed pip value in that currency to your own. The importance of knowing how to calculate these things cannot be stressed enough. So make sure you know how to determine the value of the pip, even if the majority of forex brokers integrate automatic pip calculators into trading platform.