How to Calculate Pip Value in Forex Trading? Pip value in forex trading can seem hard to grasp at first but it’s definitely not rocket science.
A pip (short for percentage in point) is the smallest change in currency pairs. Calculating pip value will help you work out how much you can win or lose when the price moves by 1 pip.
Sounds complicated but it’s simple once you break it down and anyone can do it with the right formula.
Traders whether beginners or pros should calculate pip values to manage their risk.
Knowing the pip value will help you work out how much you are risking on each trade and ensure you don’t over expose your account.
For example if you have a small account knowing the pip value will help you avoid placing trades that could result in losses beyond what you can afford.
The advantage of knowing pip value is that you have control over your trades and consistent risk management.
It’s not about being a math whiz – tools like calculators or trading platforms will simplify it.
While the calculation may seem scary we all start as learners and with practice it gets easier.
What is PIP?
Before we get into how to calculate pip value let’s first understand what a pip is. A pip stands for percentage in point or price interest point. It’s a unit of measurement used to measure the change in value between two currencies.
For most currency pairs a pip is the smallest price change in the exchange rate. Most forex currency pairs are quoted to 4 decimal places except for the Japanese Yen pairs which are quoted to 2 decimal places.
For example:
- If EUR/USD moves from 1.1050 to 1.1051 that 0.0001 USD change is one pip.
- If USD/JPY moves from 110.50 to 110.51 that 0.01 JPY change is one pip.
In simple terms a pip is usually the last decimal place in the exchange rate. A move of one pip means a small change in the currency pair.
What is a Pipette?
You may also hear the term pipette or fractional pip in forex trading. A pipette is a fraction of a pip and is one tenth of a pip. Some brokers quote currency pairs beyond the standard four decimal places.
They use the fifth decimal place to show more price movement beyond the standard four decimal places
For example:
- If EUR/USD moves from 1.10542 to 1.10543, that 0.00001 USD movement is one pipette.
- If GBP/USD moves from 1.30542 to 1.30543, that 0.00001 USD movement is also one pipette.
Although pipettes might seem tiny, they can be very handy when you need to measure exactly in your trades. But pipette value is often much less important than pip value.
How to Calculate PIP Value in Forex Trading
Now that you know what pips and pipettes are, let’s look at how to calculate pip value. Pip value depends on the currency pair you’re trading, the size of your trade (also known as the “lot size”) and the exchange rate.
Knowing how to calculate pip value will help you know how much you can gain or lose based on the market movement.
To calculate the pip value, you need to follow a formula and we will guide you through it step by step.
Step 1: The Basic Formula
Here’s the basic formula to calculate pip value:
Pip Value = (Pip in decimal form) × (Trade Size) / (Exchange Rate)
In this formula:
- Pip in decimal form is the value of one pip in the counter currency. For most currency pairs, this is 0.0001. For JPY pairs, it’s 0.01.
- Trade Size is how many units of currency you’re trading. A standard lot is usually 100,000 units, but there are also mini lots (10,000 units) and micro lots (1,000 units).
- Exchange Rate is the current exchange rate of the currency pair.
Let’s go through a few examples to make it clearer.
Example 1: USD/CAD
You’re trading USD/CAD and the exchange rate is 1.2500. You’re trading a standard lot of 100,000 units. Here’s how you calculate the pip value:
- Pip in decimal form: 0.0001 (since USD/CAD is quoted to 4 decimal places)
- Trade size: 100,000 units
- Exchange rate: 1.2500
Using the formula:
Pip Value = (0.0001) × (100,000) / (1.2500) = 8
So for every 1 pip movement in the USD/CAD pair, your position will be 8 USD.
Example 2: GBP/JPY
Now let’s look at the GBP/JPY pair where the rate is 150.00. Since the JPY pairs are quoted to 2 decimal places a pip is 0.01. You’re still trading a standard lot of 100,000 units. Let’s calculate the pip value:
- Pip in decimal form: 0.01 (since GBP/JPY is quoted to 2 decimal places)
- Trade size: 100,000 units
- Rate: 150.00
Using the formula:
Pip Value = (0.01) x (100,000) / (150.00) = 6.67
So for every 1 pip movement in the GBP/JPY pair your position will be changed by 6.67.
How to Calculate Pip Value for Different Currency Pairs
The above process is for calculating pip value when the counter currency (the second currency in the pair) is the same as the currency in your trading account. But if your trading account is in a different currency you’ll need to convert the pip value to your account currency.
Step 2: Convert the Pip Value to Your Trading Account’s Currency
Let’s say your trading account is in USD but you’re trading a currency pair like GBP/JPY. After calculating the pip value in GBP (6.67 GBP above) you’ll need to convert this to USD.
To convert the pip value simply use the rate of GBP/USD. If GBP/USD is 1.3500 you would multiply the GBP pip value by the rate:
Pip Value in USD = 6.67 GBP x 1.3500 = 8.99
So for every 1 pip movement in GBP/JPY your position will be changed by 8.99.
Why Pip Value Matters in Forex Trading
Knowing how to calculate pip value in forex trading is crucial because it helps you:
- Manage risk: Knowing what a pip is worth helps you plan your trades and set your stop loss and take profit.
- Calculate profits and losses: Once you know the pip value you can work out your potential profit or loss.
- Make informed decisions: Knowing pip values helps you decide how much to trade and which currency pairs to trade on, based on the reward or risk.
Summary
In summary, knowing how to calculate pip value in forex trading is a must for anyone trading forex. It helps you understand the value of each price move and manage risk better.
It may seem complicated at first but breaking it down into smaller steps makes it easier.
By calculating the pip value you can make better trading decisions and trade in line with your risk tolerance and financial goals.
Brokers will calculate pip values for you but knowing how to do it yourself gives you more control.
So whether you’re trading majors like EUR/USD or minors like GBP/JPY, now you know how to calculate pip value. Go trade!
FAQs
1. Why is pip value important in Forex?
Pip value is important because it shows the value of 1 pip in the currency pair. So you can see how much profit or loss you make from a price move. Pip value also helps with risk management so you can see how much you can gain or lose based on the size of your trade and your stop loss or take profit.
In short, calculating pip value helps you manage your risk, stick to your strategy and not risk too much per trade.
2. How do I calculate pip value?
To calculate pip value:
- Choose the currency pair: First you need to know which currency pair you are trading. For example EUR/USD or GBP/JPY.
- Choose the trade size (lot size): Traders trade in standard lots, mini lots or micro lots. A standard lot is 100,000 units, a mini lot is 10,000 units and a micro lot is 1,000 units. The lot size is how much you are trading and it affects the pip value.
- Use this formula:
Pip Value = (1 Pip / Exchange Rate) x Lot Size
For example in EUR/USD:
- Exchange rate is 1.1000.
- Lot size is 10,000 units (mini lot).
Pip value = (0.0001 / 1.1000) x 10,000 = 0.909 USD.
So for every 1 pip move in EUR/USD you would gain or lose $0.909 if you are trading one mini lot.
For JPY pairs like USD/JPY:
- The pip value formula is slightly different because JPY pairs are quoted with only 2 decimal places.
- The calculation looks like this: Pip Value = (1 Pip / Exchange Rate) x Lot Size
- For example, USD/JPY at 110.10 with a standard lot size of 100,000:
- Pip value = (0.01 / 110.10) x 100,000 = 9.08 USD. So for every pip move you stand to gain or lose $9.08 for a standard lot.
3. How does the currency you are trading affect pip value?
The exchange rate of the currency pair affects the pip value. If the base currency in the pair is your account’s currency you will calculate the pip value based on the exchange rate for the pair.
For example if you are trading EUR/USD and your account is in USD the pip value is easy. But if your account is in a different currency like GBP or EUR the pip value calculation would need to take into account the conversion between those currencies.
For pairs where the quote currency is different from your account’s currency (like GBP/USD for a trader with an account in EUR) you would need to convert the pip value into your base currency by using the current exchange rate of your account’s currency.
4. How do I manage pip value in my strategy?
Managing pip value is key to managing your risk and setting the right trade sizes. By knowing pip value you can:
- Know the value of each trade: If you know the pip value of a currency pair you can plan how much you are willing to risk per trade.
- Adjust your stop loss and take profit levels: Knowing how much a pip is worth helps you calculate your profit or loss. If a currency moves 50 pips in your favour you know how much you’ve made.
- Trade to your risk. Use pip value and stop loss to not lose more than you can afford.
