You’ve probably heard of the terms “pips,” “pipettes,” or “forex pip” thrown around, and now we’re going to explain what they are and show you how their values are calculated. Take your time with this information, as it is required knowledge for all forex traders. Don’t even think about forex trading until you are comfortable with pip values and calculating profit and loss.
Because the price in which currency pairs are denominated varies with the counter currency, traders measure price changes in pips, which are universally recognized as the smallest unit of price movement measured, roughly like a tick for stock prices or basis point for bonds. The value of a forex pip varies depending on the currency pair and quantity traded.
For pairs with the JPY as the counter currency, it’s 0.01 Yen. For all other pairs, it’s 0.0001 of the counter or quote currency.
Its cash value is always in terms of the quote currency (the one on the right), which you then convert to whatever currency your account is denominated in, using the currency pair price, which is the actual exchange rate.
You need to know how much each forex pip is worth so you know how many pips you can afford to lose and can manage your risk and money accordingly. Serious traders generally don’t risk more than 1 to 3 percent of their accounts on any one position, so they need to know how many pips equal that much cash. Once they know this, they can set their stop-loss orders on their forex strategies to automatically close their trades after losing that number of pips. As we’ll learn in the next articles, one of the primary criteria for choosing a trade is whether the likely maximum move against your position, per your technical analysis, is one you can afford, meaning one that doesn’t exceed 1 to 3 percent of your account size. If it does, don’t take the trade because it’s too risky.
Continue reading for more information or start trading and notice the forex pip value in real-time. Use code WELCOME20 at registration to get a FREE $20 welcome bonus.
In practice, any decent trading platform will have a forex pip calculator to perform this function quickly and easily. Still, it’s helpful to know how to calculate a pip if you need to monitor a position when you are away from your computer.
The most heavily traded currency pairs in the world involve the U.S. dollar (USD). When the USD is listed second in a pair the pip value is fixed and doesn't change, assuming you have a USD dollar account.
The fixed forex pip amount is:
These forex pip values apply to any pair where the USD is listed second, such as the EUR/USD, GBP/USD, AUD/USD, NZD/USD If the USD isn't listed second:
For example, to get the pip value of a standard lot for the USD/CAD, when trading a USD account, divide $10 by the USD/CAD rate. If the USD/CAD rate is 1.2500 the standard lot pip value in USD is $8, or $10 divided by 1.25.
Whatever currency the forex account is when that currency is listed second in a pair the pip values are fixed.
For example, if you have a Canadian dollar (CAD) account, any pair that is XXX/CAD, such as the USD/CAD will have a fixed pip value. A standard lot is CAD$10, a mini lot is CAD$1, and a micro lot is CAD$0.10.
To find the value of a pip when the CAD is listed first, divide the fixed pip rate by the exchange rate. For example, to find the value of a mini lot, if the CAD/CHF exchange rate is 0.7820, a pip is worth CAD$1.27.
If the pair includes the JPY, for example, the JPY/CAD, then multiply the result by 10. For example, if the CAD/JPY is priced at 89.09, to find out the standard pip value divide CAD$10 by 89.09, then multiply the result by 10, for a pip value of CAD$11.23.
Go through this process with any account currency to find pip values for forex pairs that include that currency.
Not all currency pairs include your account currency. You may have a USD account, but want to trade the EUR/GBP. Here's how to figure out the pip value for pairs that don't include your account currency:
The second currency is always fixed if a person had an account in that currency. For example, we know that if a person held a GBP account then the EUR/GBP pip value is 10 GBP for 1 forex lot, as discussed above. The next step is converting GBP10 to our own currency. If our account is USD, divide GBP10 by the USD/GBP rate. If the rate is 0.7600, then the pip value is USD$13.16.
If you can only find a "backward" quote, such as the GBP/USD rate being 1.3152, then divide one by the rate to get 0.7600. That is the USD/GBP rate. You can then do the calculation above.
If your account currency is euros and you want to know the pip value of the AUD/CAD, remember that for a person with a CAD account a standard lot would be CAD$10 for this pair. Convert that CAD$10 to euros by dividing it by the EUR/CAD rate. If the rate is 1.4813, the standard lot pip value is EUR6.75.
Always consider which currency is providing the pip value: the second currency (YYY). Once you know that, convert the fixed pip value in that currency to your own by dividing it by XXX/YYY, where XXX is your own account currency.
Understanding how pip values work is important, but if you want some help, MetaTrader 5 AM Broker offers a useful Forex Pip Calculator. Start trading and notice how pip movements affect your profit and loss for various pairs and lot sizes.
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