Pips are synonymous with forex trading; however, it can be a bit confusing if you are new to the market. Pip Value can be defined as a unit of measurement for currency movement and is the fourth decimal place in most currency pairs. For instance, if the EUR/USD moves from 1.1020 to 1.1021, that is a one pip movement. Most brokers will provide fractional pip pricing. This means you might see a fifth decimal place such as 1.10214, where the 4 equals four-tenths of a pip or four pipettes.
How much profit or loss a pip of movement produces depends on both the currency pair you are trading and the currency you funded your trading account with. It’s vital to understand that pip value matters because it affects risks. If you don’t know how much a pip is worth, you cannot precisely calculate the ideal position size for a trade; thus, you may end up risking too much or too little on a trade. Are you still wondering what is a pip in forex trading? And how it can be calculated? The section below will cover this in detail.
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Pip Value Calculation When Trading In A USD Account
Currency pairs featuring the USD are some of the most heavily traded globally. Therefore, when the USD is listed as the second in a pair, the pip values are fixed and don’t change if you have an account funded with the U.S. dollar. Below are the fixed pip amounts;
- USD$10 for a standard lot, which is 100,000 units of currency
- USD$1 for a mini lot, which is 10,000 units of currency
- USD$0.10 for a micro lot, which is 1,000 units of currency
- USD$0.01 for a nano lot, which is 100 units of currency
These pip values apply to any pair where the USD is listed second, such as the British pound/U.S. dollar (GBP/USD), euro/U.S. dollar (EUR/USD), etc. If the USD is not listed second, divide the above pip value by the USD/XXX rate.
For example, to get the pip value of a standard lot from the U.S. dollar/Canadian dollar (USD/CAD) when trading in a USD account, divide USD$10 by the USD/CAD rate. If the USD/CAD rate is 1.34105, the standard lot pip value is USD$7.46 or USD$10 divided by 1.34105.
Pip Calculation For Non-USD Account
Whatever currency the account is funded in, the pip values are fixed when that currency is listed second in a pair. Using the USD/CAD as an example again, if you have a Canadian dollar (CAD) account, any pair of 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, if the exchange rate for the Canadian dollar/Swiss franc (CAD/CHF) is 0.70347, a pip is worth CAD$1.42 for a mini lot (CAD$1 divided by 0.70347).
If the pair includes the Japanese yen (JPY)-for example, the CAD/JPY you must multiply the result by 100 after dividing by the exchange rate. That’s because, for the Yen, a pip is the second place after the decimal (0.01) rather than the fourth (0.0001). Let us imagine the CAD/JPY is priced at 79.941. To discover the standard pip value, divide CAD$10 by 79.941, then multiply the result by 100 for a pip value of CAD$12.51. Go through this process with any account currency to find pip values for pairs that include that currency.
Pip Value For Other Currency Pairs
Not all currency pairs include your account currency. For example, you might have a USD account but may want to trade the EUR/GBP. In this case, you can figure out the pip value for the pairs that don’t include your account currency by following the steps below.
Since the second currency is always fixed, if a person has an account in that currency, for instance, in a GBP account, then the EUR/GBP pip value is GBP10 for a standard lot. The next step is to convert GBP10 to your own currency. Additionally, divide GBP10 by the USD/GBP rate if your account is in USD. If the rate is o.77025, then the pip value is USD$12.98. Also, if you can only find a “backward” or reciprocal quote, such as the GBP/USD rate of 1.3152, then divide 1 by the rate to get 0.76034. And that is the USD/GBP rate. Then you can do the calculation above.