What is a PIP and How is it Calculated?
Before trading, it is essential for traders to clearly understand the concept of Point in Percentage (or pip), so that they can easily calculate their profits and losses.
PIP – Pip means percentage in points. This is the smallest price increment a currency can make. In Forex, prices are quoted up to the 4th decimal point, which is 1/100th of a cent. Most of the pairs in Forex market are quoted to 4 decimal points (.0001); however there is an exception with the Japanese Yen for which prices are quoted only to two decimal points. For instance:-
1. EUR/USD – The pair is traded at 1.3568 and if the pair moves from 1.3568 to 1.3569, then the movement in the pair is 1 pip. In the same way, if the pair moves further up to 1.3588, then the movements in the pair is equivalent to 20 pips.
2. USD/JPY - In the USD/JPY, prices are quoted up to 2 decimal points like 95.65, 98.89. If the pair is traded at 95.65 and rises up to 95.66; it shows an increase in the pair movement of 1 pip.
Lot Size – Spot Forex markets are traded in lots. The standard size of a lot is 100,000 units. A ‘mini’ lots are also available with some brokers, which is equal to 10,000 units each. A ‘micro’ lots consists of 1,000 units, but this lot size is not always available.
Calculation of pip value:
Formula Pip Value = (One pip/exchange rate) * lot size
For example:
|
Pairs
|
Exchange rate
|
Pip value
|
| 1. EUR/USD | 1.3556 | = (.0001/1.3556)*100000 = EUR 7.37 per pip |
| 2. USD/CAD | 1.1767 | = (.0001/1.1767)*100000 = $ 8.49 per pip |
| 3. USD/CHF | 1.1109 | = (.0001/1.1109)*100000 = $ 9.00 per pip |
| 4. GBP/USD | 1.5089 | = (.0001/1.5089)*100000 = GBP 6.62 per pip |
| 5. GBP/CHF | 1.6760 | = (.0001/1.6760)*100000 = GBP 5.96 per pip |
| 6. GBP/JPY | 143.88 | = (.01/143.88)*100000 = GBP 6.95 per pip |
| 7. USD/JPY | 95.39 | = (.01/95.39)*100000= $ 10.48 per pip |
Calculation of Profit and loss:
After calculating the pip value, the next step is to estimate the exact amount of profit and loss. This can be easily understood with the help of an example.
One trader is bullish on the USD/JPY pair and enters into a trade for which the bid and ask price are 95.47 and 95.49 respectively. He buys a lot size of 100,000 at the price of 95.49, which the other trader (or opposite party) is ready/willing to sell. In situations like this, the traders
must bear in mind that when they buy a pair; the offer price is the buy price, and when they sell; then the bid price is the sell price.
The next day, the pair rises heavily and the trader sells the pair at 95.89, which means that the trader gains 40 pips.
Now the final step is to calculate the pip value and gain:
| Gain | = (.01/95.89) * 100000. |
| = $10.42 per pip. | |
| Total gain | = $10.42 * 40 pips. |
| = $416. |
Thus a pip or point in percentages is the key to all forex trading, pricing and calculations. Understanding pips is not a challenge- only requires a bit of familiarity which is not a long way off for novice traders.
