Calculating PIP value

 

Calculating PIP value

-Forex Trading Perspective-
Calculating value of a PIP is a necessary step in the understanding of  profit/loss, for it enables effective implementation of risk management strategies in Forex trading.

PIP values are usually calculated in lot or volume sizes of; Standard lot (100,000 units or 1.0), Mini lot (10,000 units or 0.1) or Micro lot (1,000 units or 0.01).

Therefore, given a quote, we calculate PIP value by multiplying the given volume by ‘0.0001’ in USD/other currency pairs, and ‘0.01’ in JPY based currency pairs.

For example, a 10,000 EURUSD quote, we can get a PIP value in USD by multiplying 10,000×0.0001=1. Which means; a change (up-ward or down-ward movement) of 1 PIP in this example equals 1 USD.

In other words, 1 PIP in this example would equal to a profit or loss of 1USD.
And a 20,000 EURUSD quote, PIP value in USD will be (20,000×0.0001) =2USD per PIP, so on and so forth.

So, given 10,000 USDJPY quote, the PIP value would be (10,000*0.01=100JPY). Remember Yen based quotes are two decimal places.
And for a 30,000 USDJPY quote, it will be 300JPY per PIP (30,000*0.01=300JPY), so on and so forth.

NB: In the above examples we calculated PIP values based on Quote currency. However, it is equally useful to get PIP values expressed in the Base currency of your account. In this case, division calculations are applied to convert the PIP value from quote to base currency.

Now, using USD as our Base currency, we can for instance convert the above 300 per PIP in JPY to a value per PIP in USD (using the current exchange rate) as follows: -
300 /112.38 =2.67USD per PIP.

NB: "112.38" was the USDJPY exchange rate on the day of this writing.

Learning more about PIPs, we realize they are a key factor to trading Forex.

It is through understanding of PIPs and their values in particular that we are able to conduct an informed risk-benefit analysis so as to effectively trade Forex.

In the next article, i will look briefly on Pipettes which are fractional Pips (Pipettes in Forex Trading).

OJ Mwale – Sani Global
Further knowledge & resources: -
https://tinyurl.com/yayrdp6y
https://tinyurl.com/yc976pny
https://tinyurl.com/ycuc59sj
https://amzn.to/2JuNrYs

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