In forex trading, we usually use pips to describe the fluctuation of the exchange rate as well as calculate the profit and loss of a position. This article describes what a pip is and how to use it to calculate pip value and position gains/losses.
What is Pip?
A pip is a unit (usually 0.0001, or the smallest unit) in a currency pair that measures the rise and fall of the exchange rate.
Gold, for example, is priced in two decimal places (different traders have different ways of quoting). The figure below shows $1969.12, and the so-called one pip is taken from the last decimal place of the quoted price.
Figure 1: Gold (XAUUSD) is priced in two decimal places (Credit: kitco.com)
What is Pip Value?
Pip value refers to the gain or loss in a position resulting from the movement of a pip in forex trading. Before we calculate the point value, we need to understand the meaning of the quote.
Take the most popular currency pair – EURUSD as an example,
- The former (EUR) is the base currency and the latter (USD) is the quote currency.
- In forex trading, a standard lot is 100,000 units of the base currency.
Here is a simple formula to calculate the pip value:
No. of units in 1 lot x Number of lots x 0.0001 = pip value (in the quote currency)
Calculation of Pip Value and Floating Profit/Loss
Here are some examples of calculating point values and floating gains and losses:
The EURUSD rose from 1.1701 to 1.1706 with one lot held.
Pip value: 100,000 x 1 x 0.0001 = $10
Number of pips: 1.1706-1.1701=0.0005 = +5 pips
Floating profit: $10 (pip value) x 5 (pips) = + $50
GBPUSD to 1.2901 from 1.2906, with 1 lot held.
Point value: 100,000 x 1 x 0.0001 = $10
Number of pips: 1.2901-1.2906 = -0.0005 = -5 pips
Floating loss: $10 (pip value) x -5 (pips)= – $50
USDJPY rose to 104.09 from 104.01, with 0.5 lot held.
Point value: 100,000 x 0.5 x 0.01 = 500 Yen (* note that one pip for this currency pair is 0.01)
Number of pips: 104.09 – 104.01 = 0.08= +8 pips
Floating profit: 500 yen (pip value) x 8 (pips) = +4,000 yen
Floating profit in USD: 4,000 YEN / 104.09 (current price) = +38.43 US dollars
In general, 1 pip is 0.0001, but for the Japanese yen, 1 pip is 0.01.
Gold per ounce (XAU/USD) rose from $1956.20 to $1969.12, with one lot held
Pip value: 100 x 1 x 0.01 = $1 (one lot of gold is 100 ounces)
Number of pips: 1969.12-1956.20 = 12.92 = +1292 pips
Floating profit: $1 (pip value) x 1292 (number of pips) = + $1292
Why is it important to calculate the pip value?
So why do we need to calculate pips? Knowing the size of profit and loss can help us plan the trading strategy in advance, measure the potential risk of loss, and evaluate whether the trading plan is feasible, whether the risk is within the acceptable range, or whether to adjust the size of the position.
How are Profits/Losses Calculated in Advance?
There are thousands of different forex commodities, and the size of the contract varies from broker to broker. Therefore, although it is the same one pip, the pip value may vary. However, the idea is the same, and many brokers now provide trading calculators that relieve the investors from the burden to calculate profit/loss by hand. Just visit the broker’s website, enter the product you want to buy and the expected entry and exit price, the system will do the calculation for you.
One more Decimal Place in Quote
With the development of information technology allowing the brokers to process the quote more precisely and quickly, most forex brokers are able to offer prices in five decimal places. A unit in the fifth decimal place is called a pipette, which is equal to 0.1 pip.
More Guides in Forex Trading / CFD Trading:
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.
ZFX (Zeal Capital Market) is an online forex & CFD broker providing more than 100 products for forex trading, commodity trading, index trading, and share CFDs trading. The minimum deposit for the account opening is only USD 50. Open a trading account and download our MT4 trading platform now!