How to Calculate PIPS in Forex
Forex is the largest financial and investment market in the world and are always traded in pairs like Euro/Dollar, Dollar/Yen. Fx PIP is the smallest measure of movement in the quoted price. The quote currency is the second of the two currencies in a pair. For example in the pair Euro/Dollar, the quote currency is the Dollar.
The prices of currencies are quoted to four decimal places and so one PIP is 0.0001 units of the quoted currency. This is multiplied by the lot size with which you are trading. The number of decimal places quoted depends on the broker and size of the transaction. Forex PIPs are calculated with information like leverage used, trading size, the rate of the currency pair etc.
PIP values indicate the profit margins that will be gained through the currency trades. Understanding how Forex PIPs are computed helps to determine your profit or loss in a particular trade. The premiums you pay when opening an options contract are also computed in Forex PIPs.
Looking at the currency pairs involving USD is the easiest way to understand how to calculate Fx PIPs as a PIP value is always of $10. If you are trading GBP/USD and the market moves in your favor by 5 PIPs, you will make a profit of $50. Let’s see how.
Let us assume, your trade is EUR/USD and the price is 1.3452. When it progresses to 1.3458, it means that the PIPs value is 6. For USD, one value of PIP is equal to $10 on the standard lot. In the above example, exchange rate of 1.3452 denotes 1 Euro is equal to 1.3452 USD.
If the rate of GBP/USD is 1.9340 then 1 UK Pound value is 1.9340 US dollars. The standard lot size is 100,000. It implies 100,000 UK pounds worth 195,400 USD. If it moves one PIP, GBP/USD is 1.9341 then 100,000 UK Pounds will at this time be worth 193,410 UD Dollars. This is the case where USD is the quote currency.
If USD is the base currency, i.e. USD/GBP, then the quote is 0.5170. In this case, one US Dollar value is 0.5170 UK Pounds and 100,000 US Dollars are worth 517,000 UK Pounds. For one Fx PIP, 100,000 USD is worth 517,100 UK Pounds.
If USD is the quote currency, a pip value of $10 for a standard trading lot and if it is the base currency, the PIP value will vary with the market price. One can usually use Forex PIP alert which further provides information on Forex trading.
Have you ever thought that the only way to be successful at forex trading is to have the right tools. In this respect Fxcm.co.uk has a wealth of resources to help any aspiring forex trader be successful. Getting the right help at right time can do wonders and one should not ignore the opportunity that they get during Forex trading.