What is PIP? How to Calculate the Value of Each PIP in Forex Trading
If you’re new to forex trading, the term PIP can be confusing. So, what is a PIP and how do you calculate the value of each PIP in forex trading? Here is a detailed answer for you.
What is a PIP?
PIP stands for “Percentage in Point.” It is used to measure the smallest change in the value of a currency pair. For currency pairs with 5 decimal places after the dot, the PIP unit is calculated by the 4th decimal place after the dot in most currency pairs. For currency pairs with 3 decimal places after the dot, the PIP unit is calculated by the 2nd decimal place after the dot, such as USDJPY, XAUUSD.
For example, if the value of the EURUSD pair increases from 1.25002 to 1.25012, this means that the value has increased by 1.25012 – 1.25002 = 0.00010 ~ 1 PIP.
What is a POINT?
POINT is the last unit of a currency pair, 1 pip = 10 points.
Example:
Major pair like EURUSD: Suppose you buy EURUSD at the price of 1.20001 and the price increases to 1.20002. This means you have earned (1.20002 – 1.20001) = 1 POINT.
Cross pair like GBPJPY: If you place a buy order for GBPJPY at the price of 150.000 and the price increases to 150.500, this means you have earned 500 POINTS (150.500 – 150.000) = 50 PIPs.
How to Calculate the Value of Each PIP in Forex Trading
How to calculate the value of 1 pip with USD at the end, such as EURUSD, XAUUSD,…
In the section above, you already understand what a Pip is, now you need to calculate the value of each PIP for a pair with USD at the end XXX/USD. Suppose you buy 1 EUR/USD contract at the price of 1.11650. Each contract is equivalent to 100,000 EUR. Usually, you will sell USD to buy EUR. Therefore, the USD value you are selling will be converted according to the exchange rate.
Then:
- To buy 100,000 EUR, you need to sell: 100,000 x 1.11650 : USD/EUR = 111,650 USD.
- You close the trading position by selling 1 contract at the price of 1.11660 – equivalent to selling Euros to buy Dollars.
- When selling 100,000 EUR, you will receive: 100,000 x 1.11660 : USD/EUR = 111,660 USD.
- Thus, you initially sold 111,650 USD, then bought 111,660 USD, equivalent to a profit of 10 USD. From this, we see that 1 forex pip has a value of 10 USD.
Then:
- To buy 100,000 EUR, we need to sell: 100,000 x 1.6650 : USD/EUR = 116,650 USD
- We close the trading position by selling 1 contract at the price of 1.16660 – equivalent to selling Euros to buy Dollars
- When selling 100,000 EUR, we buy: 100,000 x 1.16660 : USD/EUR = 116,660 USD
- Thus, we initially sold 116,650 USD, then bought 116,660 USD, equivalent to 10 USD profit. From this, we see that 1 forex pip has a value of 10 USD.
How to calculate the value of 1 pip with USD at the beginning, such as USD/JPY
In the section above, you already understand what a Pip is, now you need to calculate the value of each PIP for a pair with USD at the beginning USD/XXX
- Suppose you sell 1 lot of USD/JPY at the price of 148.120. Each lot is equivalent to 100,000 USD. Thus, you are selling 100,000 USD to buy: 100,000 x 148.120 = 14,812,000 JPY.
- The currency pair price moves in the opposite direction of your expectation and you decide to cut your losses. You close the trading position at 148.110. 1 USD/JPY forex pip is at the 2nd decimal place. Thus, the price has moved against the trend: 148.120 – 148.110 = 0.01 equivalent to 1 pip.
- You close the trading position by buying 1 lot of USD/JPY at the price of 148.110. To buy back 100,000 USD at this rate, you lose: 1 x 100,000 x 148.110 = 14,811,000 JPY.
- Thus, to buy back 100,000 USD, you lose an additional 1,000 JPY compared to the initial Dollar sale, meaning you have lost 1,000 JPY.
- Loss of 1,000 JPY for 1 pip equivalent to each pip. At the current price, 1 JPY is equal to 148.110 USD
- Therefore, 1 pip is equivalent to about 6.75 USD.
For simplicity and easy understanding, remember how to calculate the value of each pip
– For pairs with USD at the end (XXX/USD): The pip value is 10$.
Example: XAUUSD, EURUSD, CHFUSD 1 pip value is 10$
– For pairs with USD at the beginning (USD/XXX): The pip value is 1000/current price.
Example: USD/JPY current price is 148.110 USD, so the pip value is: 1000/148.110 = 6.75$
– For pairs without USD at the end (XXX/YYY): The pip value is 10$ multiplied by the YYY/USD exchange rate, where the YYY/USD exchange rate is the rate at the time of calculating the pip value.
Example: With the current NZD/USD exchange rate of 0.6000 –> The pip value of all pairs with NZD at the end (XXX/NZD) is 10 x 0.6000 = 6$
You can also look up the value of each pip for all pairs at pip-calculator
Conclusion: After this article, you have understood what a pip is, what a point is, and how to calculate the value of each pip for different currency pairs. To learn more about how to play Forex for beginners, please refer to the How to Play Forex for Beginners guide.
