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Lesson 11: Pips calculation

Lesson 11: Pips calculation

A pip is the unit of measurement of a change in a currency pair’s value. Learn more about pips in forex trading, including pips value for any currency pair and account currency.

You’ve probably heard of the terms “pips,” “pipettes,” or “forex pip” thrown around in forex trading, and now we’re going to explain what pips are and show you some forex pip calculation examples for any type of currency pair and account currency. Take your time with this information, as it is required knowledge for beginners. Don’t even think about getting started until you are comfortable with forex pips values and calculating profit and loss.

What is Pip in Forex Trading

A pip is a very small measure of change in a currency pair in the forex market. 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 in stock trading. The value of forex pips 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.

For example:

  1. For the EURUSD and most other pairs, movement from 1.4000 to 1.4001 is one pip.
  2. For the USDJPY, a movement from 80.00 to 80.01 is one pip.

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 forex 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 trading strategies to automatically close their trades after losing that number of pips. As we’ll learn in the next CAPEX Academy courses, 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.

How to calculate the pip value of your forex trades

In practice, any decent trading platform or trading app will have a 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.

A few things will determine pip movements, including:

  • The volatility of the currency pair being traded
  • The size of the position
  • The currency pair’s current market price (exchange rate)

#1 Pip Calculation When Trading a USD Account

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:

  1. $10 for a standard lot which is 100,000 worth of currency.
  2. $1 for a mini lot which is 10,000 worth of currency.
  3. $0.10 for a micro lot is 1,000 worth of currency.

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:

  • Divide the pip values above by the USD/XXX rate.

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.

#2 Pip Calculation for a Non-USD Account

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 forex 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.

#3 Pip Calculation for Other Currency Pairs

Not all currency pairs include your account currency. You may have a USD account but want to trade the EUR/GBP. Here is how to figure out the forex pip calculation for pairs that do not 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 forex pips 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.

Final words

Put these forex pips calculations to the test with a risk-free practice account.

Before trading forex, you should be aware that the market is susceptible to high levels of volatility and as a result, a currency pair might experience a price movement of several pips in a short space of time.

As a result, you should carry out both technical and fundamental analysis on the currency pair you want to trade before you open a position. We also offer educational resources like CAPEX Academy to help you understand trading and get to know the risks.

Learn more about CAPEX Academy

FAQs

What is a Pip Calculator?

The pip value calculator helps you to calculate the value of each position in the currency you want to trade-in. This information is very important in managing your risk more efficiently.

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Users/readers should not rely solely on the information presented herewith and should do their own research/analysis by also reading the actual underlying research. The content herewith is generic and does not take into consideration individual personal circumstances, investment experience or current financial situation.

Therefore, Key Way Investments Ltd shall not accept any responsibility for any losses of traders due to the use and the content of the information presented herein. Past performance and forecasts are not reliable indicators of future results.
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