How To Calculate PIP Value In Forex Trading
Pip stands for “price interest point” or percentage interest point.” A pip is the smallest price movement made by an exchange rate based on the forex market structure. In other words, it is the minimum tick that a currency pair moves in an upward or downward direction. If the price of a currency pair moves up or down 0.0001, it is said that the price has moved one pip. If the price movement either up or down is 0.0005, then the price is said to have moved 5 pips.
Let us look at this example: if the price of a GBP/USD forex pair moves from $1.0550 to $1.0556, it is said that the GBP/USD has increased by six pips ($0.0006). if the price of the same currency pair should increase from $1.0550 to $1.0575, it is then said that the GBP/USD is up 25 pips ($0.0025). This example is an indication of how a pip is expressed through the fourth digit after the decimal.
However, it should be noted that certain currency pairs are expressed by using the second digit after the decimal rather than the fourth. A good example of this is the pips of the yen-based currency pairs such as USD/JPY, GBP/JPY, AUD/JPY, EUR/JPY, etc. If for instance, the EUR/JPY experiences price movement from 115.20 to 115.80, the price is said to have moved 60 pips (0.60).
Measuring Currency Pips on the Forex Chart
To measure currency pips on a forex chart, there are a few things that need to be done first:
- Locate the price movement on the chart
- Note the beginning of the movement
- Note the end of the movement
- The price at the beginning of the movement should be subtracted from the price at the end of the movement
A basic measurement of pips is shown in the chart below:
This is the forex pip chart of the EUR/USD for 30th November 2021. The chart displays a sudden price drop due to an economic report. Once the movement has been identified, it is beginning (top) is marked at 1.13821 while the end (below) of the movement is marked at 1.12345. The next thing is to subtract the initial price from the final price:
1.12345 – 1.13821 = -0.01476
This indicates that the price has dropped by 0.01476 which will translate that for the EUR/USD currency pair, there has been a drop of 147.6 pips.
Let us now move on to how the measurement of the pip movement for a bullish price run can be done:
The forex pip chart above is for the EUR/USD forex pair for 29th December 2021 and it displays a bullish price movement for this timeline. To measure the size of this movement in pips, we start by finding the point of movement and then mark its beginning (low) and its end (high). The next thing is to calculate the difference between the end and beginning of the movement as shown below:
1.13681 – 1.12729 = 0.00952
The result from the calculation above shows that the price of the EUR/USD forex pair has increased by 0.00952. Therefore, it can be concluded that the EUR/USD has experienced an increase of 95.2 pips.
And finally, let us examine how to measure the price change in pips for Yen-based forex pairs:
The forex pip chart above is for a USD/JPY currency pair for the timeline of March 3th to 4th, 2022. The chart displays a price increase in the currency pair and it is time to measure the size of this increase in pips. We follow the usual process of spotting the move, marking the beginning of the move (low) and end of the move (high), and then calculating the difference between the initial price and the end price just like in the previous examples.
116.337 – 114.943 = 01.394
It can be observed that the pip calculation for this Yen-based currency pair is measured using the three digits after the decimal just like we discussed earlier. In this case, a price increase of 1.394 translates to a positive movement of 139.4 pips for the USD/JPY forex pair.
Note that when the pip move of a bullish run is being measured or calculated, the low should be subtracted from the high. On the other hand, when the pip measurement is for a bearish move, then the high is subtracted from the low.
What is the Pip value?
The pip value refers to the price assigned to a one-pip move in forex trade and it tends to be used when referencing the losses and gains of a particular trading position. The meaning of the pip value can differ across currencies but since most major currency pairs are priced to four decimal places, then a pip is often equal to the fourth figure after the decimal point.
For example, in a major currency pair like GBP/USD, 0.0001 signifies one pip. Due to the infinitesimal value of pips, forex trading is done in micro lots, mini lots, and standard lots which translate respectively to 1,000, 10,000, and 100,000 units of currency. While the value of a pip is quite tiny, it can represent a significant exposure when leverage is used and it can have considerable influence on a trader’s open position.
The pip value is determined by the currency pair being traded, the exchange rate of the currency pair, and the size of the trade. Here is a little insight on how to calculate pip value: divide one pip which tends to be 0.0001 by the prevailing market value of the forex pair and then that figure should be multiplied by the trader’s lot size which refers to the number of base units being traded.
From the calculation, it will be clear that the value of a pip will vary across currency pairs due to the differences in exchange rates. However, there is an exception to this rule; if the US dollar is the quote currency in a currency pair, the value of a pip is constant. So, if the lot size is 100,000, the pip value thus equals $10. Usually, the calculation of the pip value is done by the forex broker the trader uses but it is always good for traders to know how the process works.
How to calculate Pip value in Forex Trading
When there is a price movement in a direction that is favorable to the trader, the trader’s open position will increase in value, and on the other hand, if the price movement is against the trader, then the open trading position is bound to reduce in value. The question then becomes “How can a trader know the incremental gain or incremental loss?” For this question to be answered, the pip value for the currency pair being traded needs to be calculated and we will be examining how to do that for major currency pairs and cross currency pairs.
How to Calculate Forex Pip value for Major currency pairs
We will be starting with the major currency pairs. If the USD/CAD is being traded at 0.9730, this indicates that 1 US dollar is equal to 0.09730 Canadian dollars.
The pip can be converted into USD through a simple formula: (0.0001 / Exchange Rate)
Using the information we have about the currency pair, it becomes:
(0.0001 / 0.9730) = 0.0001027749
So, if the trader purchases the USD/CAD forex pair at 0.9730 and the price rises 1 pip to 0.9731, that will be a profit of $0.0001 for every unit that was purchased. If the trader then gets to trade 10,000 units of this currency pair, the result is to be multiplied by 10,000:
0.0001027749 x 10,000 = 1.027749 which is rounded to $1
If the trader decides to enlarge the trade size and purchases up to 100,000 units of the same currency pair, then the value of 1 pip becomes:
0.0001027749 x 100,000 = 10.27749 which is rounded to $10
The forex pip value involves two separate formulas which can be joined into one formula:
Pip Value = (0.0001 / Current Exchange Rate) x Units Traded
(0.0001 / 0.9730) x 100,000 = 10.27749 which is rounded to $10
How to Calculate Forex Pip value for Cross currency pairs
For cross currency pairs, calculating the forex pip value is similar to the way it is done for major currency pairs except there is additional formula to the original formula. Since cross currency pairs in forex do not contain the USD as either a base or a quote currency, the first thing is to calculate the value of 1 pip in the base currency of the forex pair. Let us use the EUR/JPY forex pair as our example at the rate of 125.40 yens for 1 euro. To calculate the value of 1 JPY pip in EUR, it will be:
0.01 / Current Exchange Rate (remember, the pip is two decimal places for Yen-based currency pairs)
0.01 / 125.40 = 0.0000797448
This shows that 1 pip of the EUR/JPY forex pair costs 0.0000797448 euro. If this figure is multiplied by the traded units, it will give the pip value in euro but that will have to be converted to USD. This is done by using the current EUR/USD exchange rate; for this example, we will assume it is 1.1500.
Since it has been calculated that 1 pip of the EUR/JPY costs 0.0000797448 euro, multiplying it by the current EUR/USD exchange rate:
0.0000797448 x 1.15 = 0.0000917065 USD
This shows that 1 pip of the EUR/JPY currency pair costs 0.0000917065 USD per single unit. If the trader purchases 10,000 units, the forex pip value becomes:
0.0000917065 x 10,000 = $0.917065 for the USD/JPY currency pair
If the trader purchases 100,000 units, then the forex pip value for the USD/JPY currency pair becomes:
0.0000917065 x 100,000 = $9.17065
To summarize the process, the first is to determine the pip value in the base currency which is done by dividing 0.0001 (0.01 for yen-based currency pairs) by the current exchange rate of the cross pair. Then combine the base currency of the cross currency pair with the USD and in the above example, it is the euro which means the second forex pair that the trader will be working with is the EUR/USD. The result of the pip value for the cross currency pair was multiplied by the EUR/USD exchange rate because the USD is a quote currency in this example.
If it is a case in which the cross currency pair being traded is the CHF/JPY and the value for 1 pip was calculated in CHF as expected. The trader will then need the USD/CHF exchange rate to convert the 1 pip value to USD and since USD is the base currency in this case, the result for the pip value of the cross currency pair is divided by the USD/CHF exchange rate instead of multiplying like in the previous case. After the conversion of the 1 pip value to USD, the only thing left to do is to multiply the result by the traded units.
Below is a single formula for the calculation of a cross pair like EUR/JPY and a pair like CHF/JPY
EUR-JPY Pip Value = [(0.01 / EUR-JPY Exchange Rate) x (EUR-USD Exchange Rate)] x (Units traded)
CHF-JPY Pip Value = [(0.01 / CHF-JPY Exchange Rate) / (EUR-USD Exchange Rate)] x (Units traded)
The calculation for the cross currency pair might look a bit complicated but the point is to focus on these two questions when performing the calculation:
- “Is the yen a part of the forex cross pair?” If the answer is yes, then 0.01 is used for expressing the pip while 0.0001 is used if the answer is no.
- “Is the USD a base or quote currency in the major pair used for conversion?” If the USD is a base currency, then division is done but if it is a quote currency, then multiplication is done.
Pip Value Calculator
While the intricacies of calculating pips can be confusing initially for the trader, there is always a forex pip calculator that can do the calculation quickly. When traders first open a forex pip calculator, an empty table will be shown containing different forex pairs in the first column and the different units traded – 1,000, 10,000, 100,000.
The calculator will ask the trader to choose the desired currency that the pip value should be expressed and this is the trader’s account currency. Then click “Calculate” and the table will automatically contain all the results based on the prevailing exchange rates of the forex pairs. The table will also show the current price of every currency pair as well as the forex pip value for 1,000 units, 10,000 units, and 100,000 units respectively. The image below shows how the typical results from a forex pip calculator will be displayed:
The table above shows well-organized information displaying the pip value of 16 different forex pairs while also taking into account the units of a Micro lot, Mini lot, and Standard lot. The current price used to calculate the respective pip value for each forex pair is also shown.
Monitoring the forex pip value of the various currency pairs empowers traders to make better decisions about the execution of their trades. It also makes it possible to place a stop-loss and have a solid understanding of the level of risk involved in each trade. Also, having knowledge of the pip value and how to calculate it will enable the trader to apply shrewd position sizing strategies that will enhance the possibility of significant profits.