In foreign exchange trading, it’s more than common that you’ll be encountering the term “pip” or “pips.” It’s also an essential term you need to understand if you’re serious about Forex trading. Generally, in learning about pips, mathematical calculations and knowledge about currency pairs are handy.

What Does a Pip Mean?

Pip means Percentage in Point, as defined by traders. What are pips in Forex? A pip is used to measure the price of exchanges of currencies in Forex trading. It defines the smallest change of the values between currency pairs and is usually represented by a single digit in the fourth decimal place, equal to 1/100th of 1% or 1% of 1%.

For example, if the pip value of a currency pair EUR/USD moves from 1.1017 to 1.1018, that is one pip movement. The amount of profit and loss from such movements relies on the currency pair the trader is trading and what currency they funded their account with. And for traders, they use it as a reference for their gains or losses.

Pips and Positions

Additionally, aside from being a representation of the changes. Pips are usually used in determining position sizes in Forex trading. With the correct amount or number of pips and the value of a pip, a trader can manage risks while trading positions by determining the ideal position size for a trade they will make.

Calculating the Pip Value: Step-by-Step Guide

It’s also an advantage for Forex traders to know how to calculate pips. To help you understand more about pip in Forex trading, here are the steps in calculating pips:

1.     Check the Pip Size

Most currency pairs have a pip size of 0.0001 aside from pairs with the currency of the Japanese yen. For a currency pair with a Japanese yen, the pip size is 0.01 because the currency itself has a relatively low value.

2.     Determine the Exchange Rate

The exchange rate is equal to the value of one currency to another currency. For example, the exchange rate between US dollars and Euros. How many US dollars must you have so you can buy a euro?

3.     Compute the Pip Value

Calculate the pip value for a certain position size using the general formula below:

Pip Value = (The pip size / the exchange rate) x position size

Based on the formula, the pip value is any value obtained from dividing the pip size and the exchange rate of a particular currency pair and multiplying it to the position size.

4.     Convert to your Currency

Convert your calculated pip value to the currency of your trading account using, again, the prevailing exchange rate.

Example Calculation

Following the procedure and steps above, let’s have an example of how to calculate a pip value.

Let’s say you want to determine the pip value for a currency pair with US dollars as the counter currency or quote currency. Popular currency pairs that have US dollars as a counter currency include AUD/USD, EUR/USD, NZD/USD, and GBP/USD. All of these currency pairs have the same pip size, 0.0001.

Next, checking the exchange rate for the two currencies. Let’s say the rate for the pair of EUR/USD is 1.19842. With that and an assumption of a position size of 100,000 euros, you can now input them into the formula from Step 3. Plugging the values into their corresponding parameter, the equation will look like this:

Pip value = (pip size / exchange rate) x position size

= (0.0001 / 1.19842) x 100,000 euros

Pip value = 8.344320021 euros

Based on this computation, you can say that for the currency pair of EUR/USD with an exchange rate of 1.19842 and position size of 100,000 euros, the pip value is equal to 8.344320021 euros.

Now, if you want to convert this amount to the currency your trading account uses, multiply it again by the exchange rate of the pair.

For the EUR/USD, we assumed an exchange rate of 1.19842. Converting the pip value to US dollars,

8.344320021 euros x 1.19842 US dollars per euro = 10 US dollars

This means that for a trading account that uses euros as its currency, the pip value is 8.344320021 euros. While for an account in a USD currency, the pip value is 10 US dollars.

The Importance of Pips

A pip is the movement of exchange rates in currency pairs. It is a term used in Forex trading to show how much the rates have changed. The value of a pip can easily be calculated manually or by a calculator since exchange rates and other affecting parameters may vary depending on the brokers or other things. In Forex trading, a pip is important. Generally, because they measure and represent the gains and losses of a trade.

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