How to Calculate Pips in Forex Trading ?
As all traders know, we can measure the movement in the exchange rate of any asset by pips. That is why having a thorough understanding of how to calculate pips and their value will help us in our usual trading. Not only in the estimation of losses and gains, but, also, in monitoring our risk per trade with more accuracy. Thus, in this lecture, we will introduce to you the “Percentage in point” and how it can be a useful tool for trading in different markets (Forex, Stocks, coins market etc…).
Calculate Pips guideline
What is a pip in forex trading?
In fact, Pip is an abbreviation for “Percentage in point”, it also stands for “price interest point”. Nevertheless, this term represents the popular unit of measurement in the exchange rate between two currencies. In other words, it refers to the little price movement in a currency pairs quotation.
Actually, most currency pairs are quoted in 5 decimal points. however, we calculate them using the fourth decimal. Hence, when we say that the price of specific currency pair has increased by 0.0001, then it means that the pair’s price has increased 1 Pip. On the other way, a drop by 0.0005 in a pair’s price reflects a price decreasing by 5 pips.
On the other side, we can find currencies such as the Japanese “Yen” that are quoted in just two or three decimal points, according to the trading platform. In this case, the second decimal represents the base of a pip change. For instance, a movement from 0.01 to 0.02 defines a one pip move.
Depending on the example (image) above, we will consider that the rate exchange of GBP/USD= 1.3107. This means that with 1 GBP we can buy 1.3107 USD. So, if the rate changes to 1.3102, it indicates that there is a difference of 1.3107 – 1.3102 = 0.0005, which is 5 pips. On the other way, let’s assume that EUR/YEN= 135.54. This means that with 1 EUR we can buy 135.54 YEN. Then, a quotation of EUR/YEN= 135.57 indicates a price change of 135.57 – 135.54 = 0.03, which represents 3 pips.
Even though pip is the most used unit of measurement in the exchange of rates, brokers and trading platforms have introduced another small unit called “The pipette”, which we will talk about in the next part.
What is the difference between a pip and a pipette?
In fact, by dint of technological growth and the increased number of traders, the trading platforms (Brokers) start to present quotations for normal pairs with 5 decimal places, and the JPY pairs with 3 decimal places instead of 4 and 2 decimal points. This leads to the introduction of a new unit of measurement and a new term: Pipette.
In simplest terms, a pipette is a fractional representation of a pip. Generally, a tenth of a pip (1/10). At times, the trading platforms define currency pairs with more than 2 or 4 decimal places (with 5 and 3 decimal places instead) in order to help traders in calculating pips. So the pipette designates the fifth decimal place in most exchange rates and the third, in the case of Japanese Yen pairings.
Thus let’s discover how we can read the pip and pipette value in both platforms: Metatrader and Tradingview.
In effect, we can use the pips and pipettes to calculate profits or losses on a trade. Therefore, comprehending their changes and how we can calculate them will help us better manage our trading strategy.
How to calculate pips?
In order to calculate pips, we can follow a pretty clear process. At first, we should identify the price move on the chart by specifying both:
-The price at the beginning of the movement.
-The price at the end of the movement.
Next, we will subtract the two prices to calculate pips. So, let’s illustrate together some simple examples.
Calculating Pips for forex pairs USDJPY pair
As you can notice in the USD/JPY daily chart, there was an important price rise from 116.130 to 123.888, before back to trading at 122.790. Thus, after identifying “the start move price” and “the end move price”, we can simply deduct:
123.888 – 116.130 = 7.758 => This defines a 7.758 profit on the trade, which can be represented as 775.8 pips (775 pips and 8 pipettes).
Calculating Pips for metals like GOLD
In fact, metals trading and trading currencies are very similar. The only difference is that while pips represent a price movement of 0.0001 for most currency pairs, pips in the metals market define a price movement of 0.01 for most trading platforms. Generally “Gold” is priced in USD. So, to calculate pips for XAUUSD, we need to know that 1 pip profit means a 0.01 move in XAUUSD. For instance, when the XAUUSD price shifted from 1917.523 to 2049.946, it is 13242 pips move, as shown below;
How is pip value calculated?
Generally, we don’t have to calculate pip values since they will be calculated automatically by the brokers and the trading platforms. Also, we can find multiple online calculators that can help us to define decimal places and percentages. However, in this course, we will learn how to calculate the pip value because we think it is a useful and practical skill that we should familiarize ourselves with.
Thereby, to obtain the pip value we should multiply one pip or one-hundredth of a percent (decimal place) by the lot size (trade size). Then, divide the result by the current market value (exchange rate) of the currency pair.
Pip value = (one pip * lot size) / exchange rate
It is clear that the pip value will differ between currency pairs (also stocks) because the exchange rates will be always changing and unstable. So, some examples
Example 1 : USDCHF
Let’s suppose that we are trading the U.S. Dollar and the Swiss Franc pair (USD/CHF) in a USD account. Then, to calculate the pip value we must simply apply the formula that we have already mentioned above.
- One pip = 0.0001
- Account base currency =USD
- Exchange rate: USD/CHF = 0.92630 (as we see in the hourly chart)
- Lot size = 1 standard (100000 USD)
Pip value = [(0.0001 * 100000)/0.92630] = 10.79$ => This means that each pip is worth 10.79$. In other words, we would lose or gain 10.79$ for each small movement (0.0001) in the exchange rate of the USD/CHF. For instance, if we open a buy order and the market value of the USD/CHF changes from 0.92630 to 0.92650, it defines a 2 pips move. Hence, our total positive pip value (profits) will equal: 2 * 10.79$ = 21.58$.
Example 2 : Silver
Now, let’s consider that we are trading (silver) the pair (XAG/USD) in a USD account. So, to calculate the pip value we will repeat the same steps done with the “USD/CHF” pair. the only difference is that one pip = 0.01.
- One pip = 0.01
- Account base currency =USD
- Exchange rate: XAG/USD = 24.740 (as shown in the daily chart)
- Lot size = 1 mini Lot (10000 USD)
Pip value = [(0.01 * 10000)/24.740] = 4.04$ => This means that each time a pip change happens, we would lose or gain 4.04$ approximately. For instance, if the exchange rate of the XAG/USD changes from 24.74 to 24.70, it results in 4 pip moves. Then, if we open a buy order during this session we will lose money and the total negative pip value will be 4 * 4.04$ = 16.16$.
In brief, A pip or a pipette is a fundamental concept in the trading world. So, understanding those units of measurement and especially “Pips” will go a long way in assisting you to become a more profitable trader.