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How to Calculate Pip Values in Forex Trading

Forex Pip Values Calculator

Accuracy and precision are highly important in the forex sector for one to trade to their maximum potential. Among the basic things that any trader should know is the value of a pip. But what exactly is a pip, and why does it play such a big role in your trade?

What is a Pip in Forex?

If there is a fundamental concept that you cannot avoid while trading in forex, then it is the “pip”. The term “pip” stands for “percentage in point” or “price interest point,” which refers to the smallest unit by which a currency pair’s exchange rate can change. To be able to navigate the forex markets effectively, every trader must know what this means and how to work with it.

Understanding Pip

In order to understand the functioning of pips, think of them as an instrument used in measuring the difference in value between two given currencies. It aids traders in knowing their gain or loss in a trade. For instance, when the EUR/USD changes its position from 1. 1050 up to 1. 1055, this indicates that there has been a little five pips movement.

Pips play a crucial role as they offer traders a uniform way of discussing or measuring price changes in various currency markets, which in turn help make trading more consistent and transparent. Understanding pips helps traders:

  • Manage Risk: By knowing how much each forex pip movement impacts your trade, you can better manage your stop-loss and take-profit levels.
  • Calculate Profit and Loss: Pips allow traders to calculate the potential profit or loss of a trade by translating price changes into monetary terms.
  • Compare Trades: Pips provide a universal metric that allows for easier comparison of price movements across different currency pairs and trading strategies.

How to Calculate Pips in Forex Trading

In forex trading, it is important to know how to calculate pips. Here’s a step-by-step guide to help you calculate pips accurately:

1. Identify the Currency Pair

Forex pip calculation may vary a bit based on what currency pair you are trading. The general rule is that most currency pairs are quoted to four decimal places, but there can be some exceptions. For instance, pairs involving the Japanese yen are quoted to two decimal places, and any pip calculator forex considers that.

2. Determine the Pip Location

In the case of almost all currency pairs, we refer to a pip as the fourth decimal. However, it is at the second decimal point for yen pairs. This knowledge is important in determining the value of one forex pip in relation to price movement.

3. Calculate the Pip Value

The monetary value that results from every movement in the pip is what is referred to as the pip value. You will have to consider two variables for you to determine this value – the size of your trade with respect to lots and the exchange rate. See the formula below:

Pip Value = (Pip Size / Exchange Rate) × Lot Size

  • Pip Size: For most pairs, this is 0.0001. For yen pairs, it's 0.01.
  • Lot Size: Typically, this is 100,000 units for a standard lot, 10,000 for a mini lot, and 1,000 for a micro lot.

4. Adjust for Different Account Currencies

If your trading account is in a different currency than the base currency of the forex pair, you’ll need to convert the pip value accordingly. For example, if your account is in GBP and you’re trading EUR/USD, you’ll need to convert the pip value from USD to GBP using the current exchange rate between GBP and USD.

5. Use a Pip Calculator

Online forex pip calculator is useful to most traders as it makes work easier. These tools work by taking the currency pair, lot size and current exchange rate of the user after which they provide the value in pips for the trader. This helps in saving time and minimizing errors that may arise due to manual calculations.

Examples of Pip

In order to comprehend the role of pips in trading, it is important that we analyze some examples. Through these examples, you will see how trading in different currency pairs involves pips and what they can do to your trade. So let’s break down a few scenarios to make the concept clearer.

1. Example 1: EUR/USD (Standard Pair)

Scenario: Suppose you’re trading the EUR/USD currency pair, which is quoted to four decimal places.

  • Current Price: 1.1050
  • Price Movement: 1.1050 to 1.1055

In this case, the price has moved from 1.1050 to 1.1055, a difference of 0.0005.

Pip Calculation:

  • The change from 1.1050 to 1.1055 is 5 pips.

Implication: If you had bought 1 standard lot (100,000 units) at 1.1050 and sold at 1.1055, you would have made a profit. The pip value in this instance would be approximately $9.05, so a 5-pip movement results in a profit of:

Profit = 5 pips × $9.05 per pip = $45.25

2. Example 2: USD/JPY (Yen Pair)

Scenario: Now let’s consider a yen-based currency pair like USD/JPY, which is quoted to two decimal places.

  • Current Price: 110.50
  • Price Movement: 110.50 to 110.75

Here, the price has moved from 110.50 to 110.75, a difference of 0.25.

Pip Calculation:

  • The change from 110.50 to 110.75 is 25 pips.

Implication: If you had bought 1 standard lot (100,000 units) at 110.50 and sold at 110.75, you would have made a profit. With a pip value of approximately $9.06 for USD/JPY, a 25-pip movement would result in a profit of:

Profit = 25 pips × $9.06 per pip = $226.50

3. Example 3: GBP/JPY (Cross Currency Pair)

Scenario: Let’s look at a cross-currency pair like GBP/JPY, which is also quoted to two decimal places.

  • Current Price: 150.00
  • Price Movement: 150.30

In this case, the price has moved from 150.00 to 150.30, a difference of 0.30.

Pip Calculation:

  • The change from 150.00 to 150.30 is 30 pips.

Implication: If you bought 1 standard lot (100,000 units) at 150.00 and sold at 150.30, you would make a profit. Assuming a pip value of approximately $6.67 for GBP/JPY, a 30-pip movement results in a profit of:

Profit = 30 pips × $6.67 per pip = $200.10

4. Example 4: AUD/USD (Standard Pair)

Scenario: Finally, let’s consider another standard pair like AUD/USD.

  • Current Price: 0.7400
  • Price Movement: 0.7420

Here, the price has moved from 0.7400 to 0.7420, a difference of 0.0020.

Pip Calculation:

  • The change from 0.7400 to 0.7420 is 20 pips.

Implication: If you bought 1 standard lot (100,000 units) at 0.7400 and sold at 0.7420, you would make a profit. With a pip value of approximately $7.14 for AUD/USD, a 20-pip movement results in a profit of:

Profit = 20 pips × $7.14 per pip = $142.80

Does the Japanese Yen Forex Rate Use Pips?

Pips are crucial in forex trading as they help us understand how prices move and enable us to work out potential profit or loss. However, when dealing with currency pairs that include the Japanese yen, the definition of a pip differs slightly compared to most other currency pairs.

For Japanese Yen Pairs:

  • Decimal Place: Currency pairs that involve the Japanese yen (e.g., USD/JPY, EUR/JPY) are quoted to two decimal places, unlike most other currency pairs that are quoted to four decimal places.
  • Pip Definition: In yen pairs, a pip is equivalent to a price movement of 0.01. This is because the yen's value is less precise, requiring only two decimal places to reflect price changes.

Pips and Profitability

To trade forex successfully, one must know the significance of pips in relation to gains and losses. Below is a simple explanation of the relationship between your trade results and the pips:

How Pips Affect Your Trades

Forex trading involves the use of pips which are used to measure the movement of currency prices. The movement of a currency pair in terms of pips determines whether one gains or loses money. For instance, if you buy EUR/USD and the price goes up by 50 pips, your profit depends on the pip value of your trade. If the price moves against you by 50 pips, you’ll see a loss.

Calculating Your Profit

If you want to calculate your profit or loss, simply multiply the number of pips by the pip value. For example, with a pip value set at $10 for EUR/USD, 50 pips gain will give you a profit of:

Profit = 50 pips × $10 per pip = $500

If the trade moves against you by 50 pips, your loss would be:

Loss = 50 pips × $10 per pip = $500

Managing Your Risk

Knowing how pips affect your account balance helps you set sensible stop-loss and take-profit levels. For example, if you set a stop-loss 20 pips away with a pip value of $10, you’re limiting your potential loss to $200. This helps you control risk and avoid big losses.

Impact of Leverage

Trading with leverage means that you can control bigger sizes of trade with a small amount of money. It is possible to increase your profits as well as losses. The use of high leverage makes the balance susceptible to small pips changes; therefore, one should be cautious while using it.

To sum up, profits or losses in forex trading greatly depend on pips. If we can calculate the value of a pip and manage them appropriately, then we will be able to trade more successfully, control risks, and make informed decisions.

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Eno Eteng
Eno Eteng Content Creator
Eno Eteng is a highly skilled and certified financial technician with a Diploma from the UK Society of Technical Analysts. As a pioneer alumnus of the Tony Elumelu Foundation's (TEF) Entrepreneurship Program (class of 2015), Eno has been a prominent figure in the financial content industry since 2009. Over the years, Eno has crafted more than 5,000 ghost-written articles for major industry players, including InvestooGroup, EasyMarkets, eToro, Spotware Systems, and high-profile clients like the Chief of Staff to the Delta State Government of Nigeria.
Crispus Nyaga is an investment analyst with great experience in financials. His expertise spans various domains, including Petroleum, Statistical Data Analysis, and Technical Analysis. Crispus is proficient in utilizing advanced tools to conduct in-depth market research and data analysis. Also, he has an academic background - holding a Master’s degree in Business from Kenyatta University.
George R. is a wide-ranging expert with experience in analysis and writing. Currently serving as a Senior Writer at 55brokers.com. In addition to this role, he has been the Chief Market and Broker Analyst since June 2020. He has played a crucial role in providing in-depth analysis and insights into the financial markets. With nearly a decade of experience as a Foreign Exchange Trader, George brings a deep understanding of market dynamics and trading strategies. His previous positions include serving as the Chief Market Analyst at SVS Securities Plc.

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