Calculating Pips in the Forex Market
The profits and losses in the Foreign Exchange market (also known as Forex) are determined by the currency’s pips.
A pip stands for Percentage in Point and is the fourth decimal point in a currency pair, 0.0001.
The current exchange rate in EURUSD (Euro-Dollar) is 1.2305. It means 1 Euro is worth 1.2305 US Dollars where the number 5 represents the pip in EURUSD.
If EURUSD price was 1.2305 and it is now 1.2306, the pair gained 1 pip.
If on the other hand the price was 1.2305 and it is now trading at 1.2304 it has lost 1 pip.
|Previous Price||Current Price||Change in pips +/-|
|1.2305||1.2389||+84 pips or +0.0084|
|1.2305||1.2235||-70 pips or -0.0070|
|1.2305||1.2578||+273 pips or +0.0273|
|1.2305||1.2011||-294 pips or -0.0294|
Secondary Currency: USD
Calculating the value of a pip is very simple.
To begin, we must first make a note of size of trade. The minimum trade size in forex trading platforms are 1,000 units or 0.01 lots in the MetaTrader4 (MT4) so we will use that as an example.
We take the trade size and multiply it by 1 pip, which is 0.0001:
1,000 x 0.0001 = 0.10
As the secondary currency is USD (EUR is the base currency and USD is the secondary currency in EURUSD) it is $0.10 or 10 cents.
So the value of each pip in a trade size of 1,000 units (or 0.01 lots in the MT4) is 10 cents. If we will take a trade size of 10,000 units (0.1 lots) as an example:
10,000 (the trade size) x 0.0001 (1 pip) = 1
As USD is the secondary currency each pip is worth 1 US Dollar.
50 PIPS a Day Forex Trading Strategy 😵
This applies for all currency pairs that have USD as their secondary currency:
EURUSD, GBPUSD, AUDUSD and NZDUSD.
Base Currency: USD
When USD is the base currency such as in USDCAD and USDCHF a different formula is used. Let’s take a trade in USDCHF, the current exchange rate of the pair is 0.9748.
To determine how much one pip is worth a trade size of 1,000 units (0.01 lots):
1,000 (the trade size) x 0.0001 (1 pip) = 0.1
0.1 / 0.9748 (USDCHF price) = 0.1
The value of one pip in USDCHF is 10 cents in a trade size of 1,000 units (0.01 lots).
Forex Crosses: No USD
When the USD is not the secondary currency, a different calculation is made.
A trader wishes to place the minimum trade size of 1,000 units in GBPNZD.
Note that USD is not the base or the secondary currency. In order to determine the value of 1 pip in GBPNZD we must do the following:
GBPUSD rate: 1.5658
GBPNZD rate: 2.0478
1,000 x 0.0001 = 0.1
0.1 x 1.5658 (GBPUSD rate) = 0.15658
0.15658/ 2.0478 (GBPNZD rate) = $0.08
Each pip in GBPNZD in a 1,000 units trade is worth 8 cents.
The exchange rate of GBPUSD is required to ensure we will have the pip’s value in US Dollars.
Another way of calculating the pip’s value in a cross like GBPNZD is to do the following:
1,000 x 0.0001 = 0.1 NZD
The reason why the 0.1 is NZD is because it is the secondary currency.
Step-By-Step Calculation with Examples
All that is required to calculate the pip’s value it to find NZDUSD rate and divide it by 10 as 0.1 is a tenth of the New Zealand Dollar.
NZDUSD rate: 0.7636
0.7636 / 10 = -0.076, which we rounded up to 0.8, which is 8 cents a pip.
Other crosses you will find in the Forex market are CADCHF, NZDCAD, EURCAD, EURNZD etc.
How to Calculate Pips in JPY Currency Pairs
In the trading platform you will also find JPY pairs and crosses.
One pip is these currency pairs and crosses is not 0.0001 but 0.01, the third decimal point. The formula to calculate the value of the pip is the same but instead of 0.0001 we use 0.01.
To find the pip value in USDJPY in a trade of 1,000 units (0.01 lots):
USDJPY rate: 119.91
1,000 (trade size) x 0.01 (1 pip) = 10
10 / 119.91 (USDJPY price) = 0.08
Each pip in a 1,000 units (0.01 lots) in USDJPY is worth 8 cents.
To Find the pip value In a 1,000 trade (0.01 lots) in GBPJPY:
GBPJPY rate: 187.82
GBPUSD price: 1.5658
1,000 (trade size) x 0.01 (1 pip) = 10
10 x 1.5658 (GBPUSD rate) = 15.658
15.658 / 187.82 (GBPJPY price) = 0.08
Therefore, each pip in a trade of 1,000 units (0.01 lots) is worth 8 cents.
We took the minimum trade size that is acceptable by most brokers to show how to calculate pips in the Forex market. The greater the trade size, the bigger the pip’s value.
Many traders exercise the given leverage in order to attain a higher pip’s value, which may reflect in a larger profit if the trade is successful.
How to trade forex using pips
For example, a trade of 100,000 units (1 lot) in EURUSD means each pip is worth $100 while in a trade of just 10,000 units (0.1 lots) one hundred pips will be required in order to reach a profit of $100.
It is important to realize that the greater the pip’s value, the greater the loss would should the market turn against your trading strategy.
Many traders are careful when it comes to determining the trade size for the reasons we have mentioned.
In binary options, the pip’s value is irrelevant as the profit is fixed no matter how many pips the currency pair has gained or shed.
Don’t be Confused by the Fractions
In many trading platforms the currency pairs have a 5th decimal point.
EURUSD would be 1.23052 instead of 1.2305. The fifth decimal point is actually a fraction of a pip and is displayed for a greater price accuracy. Many new traders believe or not are confused by the pip’s fraction when it comes to setting their stop loss and take profit in the market.
FX Rates From the MT4
Please click on the image to enlarge:
MT4 Forex Rates, 09/12/14
Aside Forex, Gold (XAU/USD) will also have fractions.
Instead of showing as $1,230.56 (the 56 are cents) it will be $1,230.567 where the figure 7 is a fraction of a cent. The same applies for other commodities, indices and stocks the broker provides in its trading software.
The ‘Bid’ is the selling price and the ‘Ask’ is the buying price.
The pips difference between the Bid and Ask is known as the spread, which is the fee for executing the trade in the market.
We wish you good luck in trading the market and hope our market education section will assist you.
To read more about forex trading you are welcome to read our Forex Trading Guide.