How to Calculate Forex Pips Value
Forex pips, short for “percentage in point,” measure price movements in the foreign exchange market, providing a regulated unit to gauge currency variations. Traders use pips to assess potential profits or losses in their trades.
Pips in forex, a “pip” stands for “percentage in point” or “price interest point.” It is a standardized unit of measurement that represents the smallest price move that an exchange rate can make based on its decimal place. Pips are crucial for measuring price changes, determining profit or loss, and setting stop-loss and take-profit levels. Let’s break down how to count pips in forex with an example:
If EUR/USD moves from 1.1498 to 1.1499, that.0001 USD rise in value is ONE PIP.
Note – In the Forex pair, EUR/USD last 5th Digit number doesn’t count many Forex brokers into their trading platform.
Understand Decimal Places:
In most major currency pairs, the exchange rate is quoted in four decimal places. The exception is the Japanese Yen (JPY) pairs, which are typically quoted in two decimal places.
JPY Pips Value Exception
Japanese yen (JPY) pairs are quoted with 2 decimal places, marking a notable exception to the four decimal place rules. USD/JPY, it is 0.01. 1 For currency pairs such as EUR/JPY and USD/JPY, the value of a pip is 1/100 divided by the exchange rate. For example, if the EUR/JPY is quoted as 132.62, one pip is 1/100 ÷ 132.62 = 0.0000754. With a lot size of 100,000 euros, the value of one pip (in USD) would be $7.54.
Cross Pairs:
For currency pairs that don’t involve the US Dollar, the pip value is still based on the fourth decimal place, but you might need to convert it to your account’s base currency to determine the actual profit/loss in your account currency.
Some trading platforms use an additional decimal place, often referred to as a “pipette” or “fractional pip,” which is one-tenth of a pip. So, if the EUR/USD moved from 1.12345 to 1.12346, it moved one pipette.
How to Calculating Pip Value
To count Forex Pips, you focus on the last decimal place movement. Each movement of 0.0001 (fourth decimal place) represents one pip. If the exchange rate changes from 1.12345 to 1.12355, it has moved 10 pips.
Example calculation:
Initial rate: 1.12345
New rate: 1.12355
Pip movement: 1.12355 – 1.12345 = 0.00010 = 10 pips
Calculating Profit/Loss:
The value of a Forex Pips can vary depending on the lot size (volume) you’re trading and the currency pair. Most brokers offer a “pip value calculator” to help you determine the value of a pip in your account currency.
For example, if you’re trading a standard lot (100,000 units) of EUR/USD, and each pip is worth $10, if the trade moves 20 pips in your favour, you would earn 20 pips x $10/pip = $200.
Setting Stop-Loss and Take-Profit:
Traders often use pips to set stop-loss and take-profit levels. If you want to set a stop-loss 30 pips away from your entry point, you’d calculate the actual price level using the Forex Pips value.
If you entered a trade at 1.12345 and want a stop-loss 30 pips away:
Stop-loss price = 1.12345 – 0.00300 (30 pips * 0.0001) = 1.12045
Remember that while Forex Pips are essential for measuring price movement, trading involves risks, and proper risk management and understanding of the market are crucial. Different brokers and trading platforms might have slight variations in pip calculations, so it’s important to familiarize yourself with the specific platform you’re using.
