In our daily lives, objects that increase or decrease in value constantly surround us. We call this increase or decrease in value as appreciation or depreciation. In the Forex trading world, we call this movement as pip.
Pip (Price Interest Point) is the small change in the value of a currency when traded to another. It is commonly referred to as 1/100 of 1% or basis point (also used to refer to a change in value of a stock). Most currency pairs normally traded use four decimal places (.0001). An exception to this is currency pairs in which Japanese Yen are involved. These pairs are quoted in two decimal places. In some cases, you may note that a broker may quote in 5 decimal places. This 5th decimal place is called Pipette.
Now you know pip and pipette, let’s learn how to determine the pip value!
Assuming you chose to trade the currency pair USD/CHF, using USD10,000, you went long (buy) at 0.9848. You close of your position when price reached 0.9858; this resulted to a gain of 10 pips. Good job!
So how much have you earned in USD or what is the pip value?
To calculate your profit, follow the following steps:
Step 1: Multiply the traded amount by 1 pip.
In the above scenario, USD10,000 would be multiplied by 0.0001 resulting to 1 CHF per pip.
Step 2: Divide the value obtained in number 1 by the closing exchange rate.
Using the 1 CHF per pip above, we would divide this by the closing exchange rate of 0.9858. The result is USD 1.0144 per pip.
Step 3: Multiply the result in number 2 above by number of pips gained or loss.
USD 1.0144 per pip multiplied by the 10 pips gain is USD 10.144.
In the trade above, you have earned a profit of USD10.144.
Let’s see if you can determine the value on you own. Determine how much you have earned or loss in this scenario:
You have made another trade using the currency pair USD/CAD for USD50,000. The transaction has closed at 1.3139 and it had resulted to a pip change of -23. How much have you lose?
Did you get loss of USD87.5242?
Yes? Good job! You can now determine the pip value on you own.
Here’s the computation:
- Value of CAD per pip: 50,000 x .0001= 5 CAD per pip
- USD Value per pip: USD 5 / 1.3139 = USD 3.8054
- Profit (loss) of the trade: 23 x USD 3.8054= USD 87.5242
Remember, the effect of a change in one pip change depends on the amount purchased, currency being traded and exchange rate during that moment.