The foreign exchange markets consist of many currency pairs, these currency pairs have different values, such as the EUR/USD, which has two currencies with high-interest rates, or the USD/JPY, two currencies with varying interest rates, one high one low.
Traders use units known as pips for calculating the value of a currency pair, which enables forex traders to evaluate its value, buy/sell quotes, and evaluate profits/ losses in forex.
What is a pip value in forex?
A pip in full is Percentage In Point and shows the value of one forex currency to the other in a forex pair. It is the last decimal place of a price quote. Forex price quotes are usually in four decimal places, such as 1.2345, except for a few currencies with two decimals places like the Japanese yen.
For example, for a forex pair such as the EUR/USD, the price quote is at 1.2435. It means that you need 1.2435 USD to buy one Euro. If the prices rise from 1.2435 to 1.2436, that 0.0001 decimal rise is a pip. Therefore, a pip is the smallest price movement in the financial market.
For a forex pair with Japanese yen, the prices are in two decimal points, for example, the price of GBP/JPY is at 0.76. If the prices move to 0.78, you have a profit of two pips. You calculate the pip movement by finding the difference between the previous and the new value.
Calculating the pip values has several benefits for forex traders. It assists the trader to understand more about foreign exchange. It also expands their knowledge on pips and helps them to speculate the range of profit or risk before opening a position.
How does a pip work in forex?
The pip value is on the forex spread, which is the bid and asks the price of the currency pairs. If you want to buy USD/ NZD, you buy it at the exchange rate. It means that you are exchanging New Zealand Dollars for US dollars.
A currency pair has two currencies, the base currency, usually on the right, is the first currency you see. The quote currency is always at the left and indicates how much of it you need to buy the base currency.
It means that for the USD/NZD, the USD is the base currency, while the NZD is the quote currency. If the USD/NZD has a quote of 1.2300, you require 1.2300 NZD to buy one USD. If you buy 100,000 units of the base currency, it means you have bought 100,000 units of USD.
One pip is the hundredth percentage of the exchange rate (1/100)%. It means that one pip is equal to 0.0001. For example, to know the value of one pip for a currency pair, you divide a pip expressed in four decimal points by the current exchange rate and multiply by the number of units traded.
If you want to know the value of a USD/NZD pair selling at a price quote of 1.2300, divide the value of a pip 0.0001 by the exchange rate of 1.2300. Multiply the number of units you want to trade, for example, by 100,000 units, which will give you $8.13.
8.13 US dollars is the value of one pip movement, which means when you open a position and profit with 50 pips, each pip is worth $8.13. To calculate the value of the total profit on a trade, multiply the value of one pip, which is $8.13, by the total profit, which is 50. In this case, you have made 8.13*50 = $406.5.
The value of pips changes with the exchange rate of the currency pair. If the exchange rate changes, you will get different solutions when calculating the pips. It is why forex traders exchange one currency rate for another depending on the interest rates changes.
What is the pipette/fractional pip?
If you understand that the expression of a pip is in four decimal points, then it easier to understand the pipette. It is when some forex brokers express price quotes of forex pairs in the fifth decimal point. It is a tenth of a pip expressed as 0.00001.
The pipette is also known as a fractional pip/point and is the 1/10 of a pip. The pipette became popular when the volume in forex trading increased. Instead of forex traders using the traditional four decimal points, they started using the fifth decimal point.
Traders started using the third decimal point for the Japanese yen expressed in two decimal points. The third decimal point gets expressed as 0.001.
How is the pip value calculated in forex?
To calculate the pip value in the currency pair, you require the exchange rate and the currency units. Evaluate the pip value using the formula:
(0.0001/( exchange rate))*units
The units are the volume of the currency pair you are buying. For example, you can buy micro-lots that are 1000 units, mini lots are 10,000 units and a standard lot of 100,000 units of the base currency. Let us take an example of the EUR/USD pair with a quote of 1.1803.
As you’ve realized, when trading the EUR/USD, you are buying one Euro for 1.1803. If you want to buy a standard lot of 100,000 units of the base currency, you use the formula:
It will give you 8.47 Euros per pip. If you speculate the direction of the price correctly, and the market moves by one pip, you have made 8.47 Euros per pip movement.
Some traders prefer multiplying the pip value of the quote currency, such as USD, which is 0.0001, by the units they want to trade. When you multiply 0.0001 by 100,000 units, they get 10 USD. If you want to convert it to Euros, you can divide it by the exchange rate of the EUR/USD.
When looking at an example of a currency pair with the Japanese yen, it has two decimal points. Its formula looks like this:
(0.01/(exchange rate))*lot size or units
Such that, if you want to trade the GBP/NZD with a quoted price of 1.2530, you want to know the value of pips, for example, for a mini lot that is 10,000 units of the base currency. That will be:
Therefore, if the trader makes a profit of 50 pips, then the trader has made a total profit of 0.798085*50, which is 39.90 British pounds.
How much are 50 pips worth?
It depends on lots and the exchange rate of the currency pair you are trading. If you are buying or selling a currency pair with the base currency in USD, and you use a standard lot, the value of one pip movement is $10, where one pip is equal to 100,000 units of the base currency.
You can find this by multiplying the currency units, for example, for the standard lot of 100,000 units by the value of one pip which is 0.0001.
100,000*0.0001, you get $10.
It means that 50 pips are 50*$10, which gives you $500. If you use the mini lot, one pip is equal to 10,000 units of the base currency, which offers you $1. It means $1*50, which you get $50, for the micro-lot, one pip is equal to 1000units of base currency and $0.10 per pip movement.
If you calculate, it would be $0.10*50, which gives $5 for 50 pips.
How can you calculate the pip value when your account currency is different from the currency pair you are trading?
The forex market is available anywhere if you have a stable internet connection and enough capital to start trading. It is why forex traders from all over the world have different currencies as their account currencies based on their country and the forex broker.
You are required to divide the pip value with the exchange rate of your account paired with the base currency. Take an example of the EUR/USD, which you want to calculate the pip value has an exchange rate of 1.5678.
If you are buying a standard lot of 100,000 base units, to calculate the pip value of this currency, use the trading formula:
(0.0001/exchange rate) * units
It shows you will make 6.38 euros for every pip movement if you profit from the price movement. If your account currency is different from Euros, convert the Euros to your account currency. Use the exchange rates of the Euros for your account currency.
For example, if the account currency is in Canadian dollars, convert the 6.38 Euros to Canadian dollars. Find the exchange rate of Euros to Canadian dollars, and divide the Euros by this exchange rate.
Take an example the conversion rate of Euros to Canadian dollars is 1.8864. If the Euros is the base currency in the currency pair such as EUR/CAD, you multiply the pip value by the conversion rate, which in this case is:
If you convert the pip value to the account currency, and the account currency is the Quote currency, such as the Canadian dollar to the Euro, divide the exchange rate to the account currency. Take an example of the exchange rate from Canadian dollars to Euros is 0.7013.
Then for every pip movement, you make 9.11 Canadian dollars, if your account base currency is in the Canadian dollar.
How much are 0.01 pips?
It also depends on the type of currency you are trading and the type of lots you use. Currency pairs with the USD as a base currency have the same value of the lot sizes. For a standard lot, one pip movement is $10, to get the value of 0.01 pips, multiplies it by $10 to get 0.1 dollars.
One pip for a mini lot is the same as 10,000 units multiplied by 0.0001, which is equal to $1. That one dollar is the value of one pip, which means to get the value of 0.01, you need to multiply 0.01 by $1. It gives you 0.01 dollars if you buy one mini lot.
For the micro-lot, it has 1000 units multiplied by 0.0001 to get 0.1 pips.
Since one pip has a value of $0.10, multiply by 0.01 to get $0.001.Each currency pair has the same value for standard, mini and micro lot, which helps calculate the value of pips.
How many pips is a dollar?
It has the same concept as to how you calculate the pip values of different currency pairs. You need to know the currency pairs you are trading and the value of the pips based on the standard, mini and micro-lots.
If you multiply one pip that is 0.0001 by the standard lot, which is 100,000 units of the base currency, you get 10$. However, when you multiply one pip, which is 0.0001*10,000 units of the base currency you get 1$, which means to get one dollar, you require 10,000 units of the base currency.
When do you use pips?
In forex spreads
To express the forex spread value, for example, EUR/USD has a forex spread of 4 pips. It shows the difference between the bid and asks prices and the forex spread is 4 pips. The bid quote is usually the price a buyer is willing to buy an asset, while the asking price is the minimum price a seller will take for the same asset.
To express the profits and losses in forex
If you buy a forex currency at a price quote of 1.2345 and its value appreciates to 1.2349, you have made a profit of 4 pips. Similarly, if you buy a currency pair and its value depreciates from 1.2345, and you sell it at a loss of 1.2341, you have lost four pips.
Pips or pipettes help traders calculate how much they have made or lost in forex. It assists traders to know how much they can anticipate in a trade and how much they can lose in a trade, and plan for it.
When setting the stop loss or the take profit
When you want to manage the amount of risk you expose yourself to, set a stop loss or a take profit. A stop-loss is a price you will sell if the market rallies against you before the prices fall further low. For example, you can set the stop-loss or the take profit at 40 pips.
The stop loss will be the number of pips the trader can manage when the market moves in the opposite direction. The take–profit is the opposite of a stop-loss, and is the maximum amount of potential profit in pips the trader can expect from a trade. It allows the trader to take their profits before the market turns.
Pips help traders to know how to express and calculate values in forex. It is fundamental if anyone wants to trade forex as it is one of the trading basics.
To calculate a leveraged trading position
Pip values or calculations allow traders to calculate how much they can expect from a leveraged position. Forex traders can calculate the pip value of a currency pair, which helps them know how much leverage they can apply.
Forex trading has high leverage from 1:50, and some forex brokers offer up to 1:2000. It is crucial to know how to calculate the pip size. It allows forex traders to limit the leverage they use that exposes them to risk.
It helps the trader plan for the trading size and budget for their trading costs before opening a trading position.
Forex traders can trade any currency pairs they wish in the currency markets. They require the knowledge of how to calculate the pip values to plan and make insightful choices when trading. Apart from the pip values, there are points, lots and pipettes. These are all values traders use to calculate the currency values and make financial operations.
The calculations are easy to understand, but because forex traders use leverage, calculating the pip value manually can be tedious. Forex brokers have the automatic pip value calculator that can calculate the pips of high volume trades in a short time.
It does not eliminate the need for forex traders to understand how to calculate the pip value manually. Calculating the pip value is imperative because it is one of the fundamentals of forex trading. Calculating the pip values helps traders understand how pips work in forex and how they can be applied to make more profit.
Frequently Asked Questions
What is a pip?
The pip in full is the percentage in point and is the units used in forex when expressing the value of the exchange rates between two currency pairs when trading forex.
What is the value of 100 pips?
This question depends on the currency pair and the volume of the trade. For a currency pair with USD as the base currency, the value of the currency per standard lot is 100,000 *0.0001= $10 per pip, which means you multiply by 100 pips, you get $1000.
For the mini lot, which has 10,000 units, multiply 10,000*0.0001, to get $1, the value of 100 pips is 1*100 is $100. While, for the micro-lot, which has 1000 units is 1000*0.0001 to get 0.10 per pip movement. If you multiply by 100 pips, you make $10 pips for 100 pips.
How can I convert the pip value to US dollars?
You can convert the value of pips by multiplying the pip value with the exchange rate. The value of a pip varies with currency pairs because of the difference in the exchange rate of currencies in financial markets.