Today we are going to be talking about pips. In the forex world, calculating pip value is not a straight forward topic.
What Are Pips & Lots?
Simply put a pip is a unit of measurement for currency movement in a pair and is usually the fourth decimal place in most currency pairs.
Let’s use The EUR/USD as an example here, if price moves from 1.1015 to 1.1016, that’s a one pip movement as the forth decimal place moves by one.
A lot of brokers provide fractional pip pricing, this means you will also see a fifth decimal place such as we see here 1.10165, and the reason for this is the fifth decimal place represents a half pip.
So far so good so here is where it starts to get a bit more complex. How much profit or loss a pip will generate per increment of movement will depend on the currency pair you are trading, and the currency you opened your account with.
Why you need to know how to calculate Pip value is because it affects you directly through risk. If you are not aware of your pip value then you can not accurately determine your risk in accordance with lot size and percentage of account risked. This could lead to you risking too much of your account in any given trade.
let’s dive a bit deeper and calculate our Pip Value When Trading with a U.S Dollar Account.
The most widely traded currency pairs in the forex market involve the U.S. dollar represented as (USD) When the USD is listed second in a pair the pip value is fixed and doesn’t change when your broker account currency is also using dollars.
The fixed pip amount is:
- $10 for a standard lot which is 100,000 worth of currency.
- $1 for a mini lot which is 10,000 worth of currency.
- $0.10 for a micro lot is 1,000 worth of currency.
These pip values apply to any pair where the USD is listed second! That is the important bit to remember here.
However If the USD is not listed second then you need to Divide the pip value by the pairs currency rate.
If we look at usd/cad For example, to get the pip value of a standard lot for the Pair, when trading a USD account, divide $10 which we know to be the standard lot size by the USD/CAD rate.
If the USD/CAD rate is 1.2500 the standard lot pip value in USD is $8
Simply put we are dividing the lot value which is$10 by the pairs rate which is 1.25.
Now that’s not so bad so let’s look at calculating pips for non USD account users ?
Whatever currency the trading account is held in, when the currency is listed second in the pair the pip value is fixed just as we have already gone over I’m going to reiterate the facts as we progress so it becomes fixed in your mind.
if you have a Canadian dollar account, any pair that has CAD as the second pair such as the USD/CAD will have a fixed pip value.
As before A standard lot is CAD$10
a mini lot is CAD$1
and a micro lot is CAD$0.10
And again To find the value of a pip when the CAD is listed first, we can divide the fixed pip rate by the exchange rate.
For example, to find the value of a mini lot, if the CAD/CHF exchange rate is 0.7820, a pip is worth CAD$1.27
Now If that pair includes the Japanese yen, such as the JPY/CAD then we must multiply the result by 10.
For example, if the CAD/JPY is priced at 89.09, in order to find the standard pip value divide CAD$10 by 89.09, then multiply the result by 10, for a pip value of CAD$11.23.
You must Go through this process with any account currency to find the pip value for pairs that include that currency.
Pip Value For Other Currency Pairs
Not every currency pair will include your brokers account currency. You may have a Dollar account, but be looking to trade the EUR/GBP pair for instance.
So let’s now look at how to determine the pip value for a currency pair that doesn’t actually include your accounts currency.
We have already demonstrated the second currency is always fixed if a person held an account in that currency.
we know that if a person held a British pound account then the EUR/GBP pip value would be Ten pound for a standard lot size. The next step would be converting this into our desired currency.
Let’s say that your brokers account money is held as a USD account then we can divide 10 pounds by the USD/GBP rate.
If the rate is 0.7600, then the pip value would equate to USD $13.16.
If you can only find a “reversed” quotation such as the GBP/USD and the rate is 1.3152, then we can divide one by the rate to get 0.7600. By doing this we now have the USD/GBP rate. You can then go on to do the calculation previously mentioned.
If your account currency is held in euros and you want to calculate the value of the AUD/CAD, remember that for a person with a CAD account a standard lot would be CAD$10 for this pair.
Convert that CAD$10 to euros by dividing it by the EUR/CAD rate. If the rate is 1.4813, the standard lot pip value is EUR 6.75.
I think we have been clear enough regarding these equations but you may want to take notes and re-watch the video a few times so you can bullet point the important factors.
Always consider which currency is providing the pip value. Once we know this we can begin to convert the fixed pip value in that currency to your own by dividing it by the pair where The second Currency is your registered accounts currency.
The subject of Understanding how pip value works is an important one, but a far more efficient way of working out Pip Value Is to use a free calculator which are widely available online, we are not above working smart over working hard and our time can be better applied to more demanding tasks. you can apply what you have learned here in a demo account and note how pip movements affect your profit and losses for different pairs and lot sizes, this will give you more confidence before trading live and allow you to determine your risk prior to taking any trades.
I hope you enjoyed today’s video ladies and gentlemen please sit back and contemplate what you have learned today, as always contemplation is the key to learning.