Pips are one of the most important concepts in forex trading. A pip (percentage in point) represents the smallest price increment in a currency pair. We use pips to express the change in value between two currencies.
As a forex trader, it’s crucial that you understand pips. They allow you to calculate your profits and losses accurately. In this beginner’s guide, we’ll walk you through the step-by-step process of calculating pips.
- Pips represent the smallest unit of price movement in the forex market. Most currency pairs are quoted to four decimal places, so one pip would be 0.0001.
- The pip value depends on the lot size you’re trading as well as the currency pair. It represents the profit or loss per pip movement.
- To calculate pip value, divide the pip movement (usually 0.0001) by the current exchange rate and multiply by the lot size.
- The pip value changes with different currency pairs based on the quote currency. Pairs quoted against USD have different pip values than pairs quoted against EUR or other currencies.
- Mini lot sizes of 10,000 units have a pip value of $1 per pip movement for USD quote currency pairs. A standard lot of 100,000 units would be $10 per pip.
- You can easily calculate your overall profit or loss on a trade by multiplying the number of pips gained or lost by the pip value.
Takeaway: Pips represent the smallest price change in currency pairs. They’re a key metric in forex trading. Knowing how to calculate them is vital for determining profits/losses.
Step 1: Determine the Quote Currency and Exchange Rate
The first step is identifying the two currencies in the pair you are trading. Identify which is the base currency, and which is the quote currency.
The exchange rate between the two currencies shows how much one unit of the quote currency costs in the base currency. For example, let’s say you’re trading EUR/USD. The euro would be the base currency while the US dollar is the quote currency. If the exchange rate is 1.1300, then 1-euro costs 1.1300 US dollars.
Takeaway: Identifying the base and quote currency in a pair you’re trading is the first step to calculating pips. The exchange rate shows how much of the quote currency is equal to 1 unit of base currency.
Step 2: Note the Lot Size Being Traded
The lot size is just how many currency units you’re buying or selling in each trade. Standard lot sizes are typically 100,000 units of the base currency, while mini lots are 10,000 units.
Microlots are even smaller, with just 1,000 units. Your brokerage account will let you know the smallest lot size you can trade. So, make sure you keep track of the exact lot size you’re trading.
Takeaway: The lot size is the number of base currency units you’re trading. Standard lots are 100,000 units, mini lots have 10,000 units, and microlots are 1,000 units. Don’t forget to keep track of your lot size.
Step 3: Find the Pip Movement
The next step is finding out the pip movement in your trade. You already know your currency pair, exchange rate, and lot size, so now it’s time to dig into the details. Remember, most currency pairs quote to 4 decimal places in the exchange rate.
So, a one pip movement equals a change of 0.0001 in the rate. For example, if the EUR/USD rate shifted from 1.1300 to 1.1301, that’s a pip movement of 1 pip, or 0.0001.
Takeaway: For most currency pairs quoted to 4 decimals, a 1 pip movement is a 0.0001 change in the exchange rate. If the rate jumps from 1.1300 to 1.1301, that’s a 1 pip move.
Step 4: Calculate the Pip Value
The next part of the process is calculating the pip value.
Here’s the formula you need:
Pip Value = Pip Movement / Exchange Rate x Lot Size
Let’s use the EUR/USD example with a standard 100,000-unit lot size:
Pip Value = 0.0001 / 1.1301 x 100,000 = $10
So, the 0.0001 pip movement divided by the exchange rate of 1.1301 for a standard lot equals $10 per pip.
Takeaway: To find the pip value, use this formula: Pip Value = Pip Movement / Exchange Rate x Lot Size. It’s a simple way to calculate the value per pip based on the exchange rate and lot size.
Step 5: Calculate Overall Profit/Loss on PIPs
Now that you know the pip value, simply multiply it by the total number of pips gained or lost in the trade to get your total profit or loss amount.
For example, if you gained 53 pips on this EUR/USD trade using a standard lot, your calculations would be:
53 pips gained x $10 per pip = $530 profit
And if you lost 75 pips, it would be:
75 pips lost x $10 per pip = $750 loss
By following these steps, you can accurately work out the pip value and your total profit or loss for any forex trade.
Takeaway: To find your total profit or loss, multiply the pip value by the total pips you gained or lost on your trade. This gives you the total amount in the base currency you traded.
Conclusion
Being able to accurately calculate pip values and understand how they impact your trading profits is an essential skill for forex traders. Use this guide to help you figure out pip values and profits/losses based on pip movements for any currency pair and lot size.
Remember, pip values change for different currency pairs and lot sizes.
Practise calculating pips on a demo account and make sure you’ve got a good grip on it before you start live trading. When you sign up for a free demo account from FXGlobe, you can start practising your pip calculation skills without risking any real money.
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Takeaway: Accurately calculating pips and pip value is essential for determining forex trading profits/losses. Practice on a demo first to master the calculations.
