[dropcap]S[/dropcap]omething people often struggle with is the value of their pips. Different transactions have different pip values, and how can we tell how much a pip is worth?
Before I get into the way to find the value of a pip and the significance of a pip’s value when trading, I’ll start closer to the beginning: defining the concept of pip. So what is a pip? A pip is a piece of Hershey’s chocolate bar. It’s delicious.
But we were on the subject of forex pips. In the forex field, a PIP stands for “point In Percentage.” It is the name of the unit of measure with which forex traders mark the smallest value shift between two currencies. In standard forex quote, a single-digit move in the fourth decimal place is representative of a single PIP.
Quick note: a forex quote is the value of one currency as a sum of another currency. These quotes always happen in pairs, as they are effectively the exchange of one currency for another. For example (with theoretical figures) – let’s say 1 EUR is worth $1.1234, which is the value of a single EUR in USD, and it is a quote.
To carry on with this example, when the value of this one Euro moves from $1.1234 to $1.1235 – this will be a movement of 1 PIP or one point.
It’s important to remember that while this is the “rule,” it comes with many exceptions. The Japanese Yen, for example. The Japanese Yen is of significantly lower value than the major currencies (EUR, USD, GBP, etc.). So a pip isn’t in the fourth decimal place. For a mini lot of 10,000 yen, a pip would be worth ¥100, and in a standard lot, a pip would be worth ¥1000.
Calculating PIPs
Disclaimer: this is the mathematical portion of the article. Arithmophobia is a fear of numbers, and there’s no such thing as a fear of maths. However, if math is not your friend, you can skip this part and go directly to the last section, where I get into the PIP calculator.
So how is pip value calculated? Like this: as you just read – a pip is in the fourth decimal place, so one pip is 0.0001. Multiply that by the lot size or contract size in your specific trade. The standard lot size is usually 100,000 of the base currency. Mini lots are often 10,000 units.
Let’s look at an example. Say we’re doing a EUR to USD exchange. A single pip movement in a standard contract (of 100,000 units) is worth $10. In the case of a mini lot, a pip would be worth $1. Of course, you should be aware that a pip’s value is different for different pairs. The pip’s value derives from the base currency in a pair.
For example, if your exchange is USD to EUR with a standard lot size, a pip will be worth €10.
As different currencies have different values, and just like in the example – €10 isn’t worth the same as $10 (as everyone knows), calculating the worth of a pip for each currency pair and lot size is essential.
Knowing the value of a pip can help you – the trader – define the monetary value of your take profit and stop-loss levels. You won’t just be following pip movements; with this calculation, you’ll have the ability to know how the value of your equity will shift with the market’s changes.
It is even more essential for risk evaluation. Not knowing the value of a pip means you won’t see the lot size you can afford to trade.
Trade what you can
You might say you can’t even afford a mini lot of $10,000, and everyone will always tell you not to trade more than you can afford to lose due to the risk of trading. That doesn’t mean you can’t trade. Many brokers, such as EverFX, will offer smaller contracts with only partial pip costs to encourage more people to enjoy the benefits of trading.
Partial pips can be the fifth decimal. For example, if 1 EUR is worth $1.12345, we’re looking at the cost for the fifth decimal – a tenth of the value of the fourth decimal. These partial pips are called “pipettes.”
Converting pips
Let’s say you have an account with a GBP base. You would need to convert your $1 pip from your mini lot into GBP to know precisely how much would be lost/gained at the end of this transaction. To make this conversion, you would need to divide the $1 by the current GBP-USD exchange rate.
When it comes to converting, it can get very complicated, especially when introducing unusual currencies into the equation – like the aforementioned Yen. That is where a pip calculator comes in most handy.
The pip calculator
Aside from the benefits of not having to do math by hand like someone living in the 1200s, the pip calculator can also save you plenty of time, which you can use to do the actual work of trading.
The pip calculator itself can be found online easily (a simple google search will work). Many brokers offer them free on their sites. The operation of the calculator is relatively simple. All you have to do is feed it the information you have, and it will supply you with the results.
The pip calculator will need the following information:
- The currency pair for the trade for which you need to find the pip value. Many calculators will already have some pairs pre-programmed (including major, minor, exotic, and cross pairs).
- The price of the selected pairs.
- The base medium of the exchange
- The size of the lot in the transaction. As described above – lot size has direct influence over pip value.
- The current exchange rate between the base currency and the account currency.
To conclude our calculations
Finally, what can you take away from this article?
Firstly, We learned what a pip is and how to calculate the value of a pip. We looked at the significance of knowing the worth of a pip. Then, we saw that calculating pip values can seem very simple. However, it can become very complicated and time-consuming, especially for the more active traders. In fact, the more active you are as a trader, the more pips you need to calculate, and the more diverse the combinations become.
Then we learned about the pip calculator: a handy tool that can save us a lot of time and hard work.
My last point would be to tell you that whatever your trading strategy is – a pip calculator can help you with it. As it is easy to come by and costs you nothing, it would be a great idea to find one you’re comfortable with and keep it bookmarked.
I hope this information has helped you improve your trading skills and your trading experience. If you haven’t started trading yet because you assumed you couldn’t afford to start – I hope this article helped you see that trading is an option for smaller accounts as well.
