What Is PIP Value Calculate Forex

What is PIP Forex?

In real life goods are the price to the penny, so a cup of coffee, for instance, will cost $1.99. In Forex the quotation is expanded to 100 to the penny. A daily move of a penny is considered a big move in the forex market. Since each point is worth one-hundredth of a penny that's equivalent to 100 point gain or loss depending on which side of the market you're on. A point in forex is called a PIP which stands for Percentage In Point. It's equal to one business point. For regular currency pairs is the fourth digit after the decimal. You can see the examples here.



The only exception is yen based currency pairs which are the second decimal number. The reason why PIP is being used in forex trading is that moving in pennies is considered huge. so a smaller unit is required to measure the amount of change. pip is simply a unit for measuring currency movement. for example if your body euro forces New Zealand dollar at one point five one two three and sell at one point five one four three you'll be making 20 pips. on the other hand, if you buy the euro versus the dollar at one point five two six three and sell at one point five point six three, you would be losing a hundred pips.


Now let's take a look at a dollar-yen if you buy at 1/16 and sell at 118 you'll be making 200 pips although you've now learned what a pip is is not enough because this unit is meaningless if there is no monetary value in a next action we'll be talking about how to calculate the value of a pip.

Calculate PIP Value Forex

How to calculate how much PIP is worth? 

In the previous section, we learned that the definition of a pip is the smallest price change that a given exchange rate can make. Since most major currency pairs are priced to four decimal places the smallest change is that in the last decimal point, as a result of this the value of a pip is going to be dependent on the quantity that is being traded. In fact, the monetary value of each pip depends on three factors. The currency pair being traded the size of the trade and the exchange rate.

Let's take a look at the euro versus the dollar as an example. The exchange rate is one point zero five four two. In this case, the euro is the base currency the US dollar is the quote currency. Next, we have to know the relationship between them. if we want to convert the base currency to quote currency we multiply by the exchange rate. In this case, one euro is equal to one point zero five for two US dollars. On the other hand, if we want to convert the quote currency to base currency we divided by the exchange rate. So one u.s. dollar is equal to zero point nine four eight five euro. 

Another thing we have to realize is that a pip value depends on the size of the trade. Because as previously said a pip is just a unit for measuring currency movement. it's meaningless without knowing how much we are trading. after we know the size of the trade all we have to do is to use this formula then we can calculate how much a pip is worth. if the trade amount is thirty thousand euros zero point zero zero zero one divided by 1.05 for two x 30,000 is equal to two point eight five, one pip is equal to two euros and 85 cents. the reason why we use 0.0001 is that in the last section we said that a pip is the fourth decimal number for regular pairs that's why it's 0.0001 

What if we are trading 100,000 same here just plug in the numbers 0.0001 divided by 1.05 for 2 multiplied by 100,000 is equal to 9 euros 48 cents. What if our account is denominated in u.s. dollar instead of euro? what can we do?

It's easy we just have to convert the euro to the dollar by looking at the exchange rate we have to convert the base currency to quote currency. so multiplying nine point four eight by one point zero five four - the answer is ten dollars. For easier memorization if the account is denominated in US dollar and US dollar is on the right side of the exchange rate for every 10,000 sighs of trade one pip is equal to one u.s. dollar.

Let's take a look at another example the dollar-yen the exchange rate is 117 point zero two how much is a pip if we are trading 250,000 dollars in a euro account. same as before we just have to plug in the numbers zero point zero one divided by one hundred seventeen point zero two multiplied by two hundred fifty-thousand. The answer is twenty-one dollars and 36 cents.

This time we are using zero point zero one is because as mentioned before for yen based currencies a pip is the second decimal places since we want to know the amount of euro we have to convert a dollar to Euro by looking at the exchange rate we now have to convert the quote currency to base currency so we divide twenty-one point three six by one point zero five four to one pip is equal to twenty euros and twenty-six cents.