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A to Z Academy / 4. Practical Guide to Forex Trading

23.What is a pip value?

November 12, 2020 00:42 AM

Pip value

Price interest points or “pip” in forex trading, are where traders should pay attention, as each pip, or pip value will affect the final calculation for price. Because forex trading involves different currency pairs, investors will find that the profit and loss for each pip of some currency pairs are different from those of others. Therefore, it is necessary for investors to calculate the actual profit and loss per pip accurately before trade order placing, in order to avoid mistaken strategies. 


Before knowing the pip value, we need to understand the calculation logic behind trading profit and loss. For example, let’s look at EUR/USD and USD/JPY. When an investor buys 10,000 euros against the dollar at the market price EUR/USD = 1.1600, by logic he needs to pay 11,600 dollars. If EUR/USD eventually rises to 1.1605, that is, 10,000 euros will be equivalent to 11,605 dollars, and if the investor chooses to sell the euros in hand, the profit is (11605–11600) dollars = 5 USD. 


Thus, for the 5-pips movement, the investor gains $5. (Each pip is equivalent to $1 when holding 10,000 euros.) 


When an investor buys 10,000 dollars against yen at the market price of USD/JPY = 106.00, by logic he pays 1060000 yen. If USD/JPY finally rises to 106.08, that is, 10,000 dollars will be equivalent to 1060800 yen, and if the investor chooses to sell dollars to close out his position, the profit is (1060800–1060000) yen = 800 yen. 


Thus, for the 8-pips movement in USD/JPY, investors made an 800 yen profit. (Each pip is equivalent to 100 yen when holding 10,000 dollars.) (The problem is, 100 yen needs to be converted back into dollar term, so 100 yen / 106.08 current price = 0.9427 dollars.) 


The investor’s actual profit in USD/JPY is: 8 pips x 0.9427 = 7.54 dollars. 


Why is the pip value not fixed?

Studying further, the pip value in forex trading will not be fixed, mainly due to several factors: 

Firstly, the size of the contract. In the above example, if an investor holds 100,000 units instead of 10,000, the value of each pip will be 10 times greater. 

Secondly, the counter (quote) currency of the pairs. When the counter currency (the right-hand side) of the traded pair is not the dollar, the profit and loss are needed to be converted. In currency pairs such as USD/CAD, USD/CHF, EUR/GBP, AUD/JPY, and USD/CNH, the profit and loss are not settled in dollar terms, so that eventually the P&L would be converted at the current market price. Such conversion is the reason for the change of the pip value, corresponding to the market price change. 

Thirdly, the dollar-denominated account. Most forex trading accounts are denominated in dollar terms, just as in the case above. However, if some accounts are denominated in currencies such as the euro or yen, the converted pip value will be different. 

Lastly, price changes of the counter currency. Since the market price is changing all the time, for the above example of yen, if USD/JPY rises to 110, then the converted pip value (100 yen /110 current price =0.91 dollar) is lower. 

It is important to note that as different brokers offer different services, the pip value may vary depending on the type of trading product and the size of the contract. Investors should read the product details carefully before trading. 


Next Article:  24. Why do the spreads sometimes become wider or narrower?


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What is a Pip Value and Why is Pip Floating? | ZFX


Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted in accordance with this article. Please be firm in your thinking and do the corresponding risk control.

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