How To Calculate Pips In Forex

Forex trading may seem daunting at first, especially when confronted with terms like “pips” that you may not be familiar with. However, once you understand what pips are and how to calculate them, you’ll realize that it’s not as complicated as it seems.

What are Pips?

Pips, short for “percentage in point” or “price interest point”, are a unit of measurement used to express the change in value between two currencies in a currency pair. It is the smallest amount by which a currency quote can change, and it is usually expressed to four decimal places.For example, if the EUR/USD currency pair moves from 1.2000 to 1.2005, it has moved up by 5 pips.

How to Calculate Pips

Calculating the value of pips is crucial to understanding your potential profits and losses in the forex market. To calculate pips, you need to know three things: the currency pair, the position size, and the exchange rate.The formula to calculate the value of one pip for a currency pair is:

pip value = (0.0001 / exchange rate) x position size

Let’s break down this formula:- 0.0001 is the value of one pip in most currency pairs.- The exchange rate is the price of the currency pair you are trading.- The position size is the amount of the currency pair you are trading.For example, if you are trading the EUR/USD currency pair with a position size of 100,000 and an exchange rate of 1.2000, the pip value would be:

pip value = (0.0001 / 1.2000) x 100,000
pip value = 8.33

This means that for every pip the EUR/USD moves, you will make or lose $8.33, depending on the direction of the trade.

Calculating Pips for Different Lot Sizes

The example above assumes a position size of 100,000, also known as a standard lot. However, not all traders trade with standard lots. There are three other lot sizes that traders commonly use:- Mini lot: 10,000 units of the base currency- Micro lot: 1,000 units of the base currency- Nano lot: 100 units of the base currencyTo calculate the pip value for a different lot size, you need to adjust the position size in the formula accordingly. For example, if you are trading a mini lot of 10,000 and an exchange rate of 1.2000, the pip value would be:

pip value = (0.0001 / 1.2000) x 10,000
pip value = 0.83

Calculating Pips for Cross-Currency Pairs

Cross-currency pairs, also known as “crosses”, do not involve the US dollar as one of the currencies in the pair. This means that the pip value needs to be calculated differently.To calculate the pip value for cross-currency pairs, you need to use the exchange rate of the quote currency against the US dollar. For example, if you are trading the EUR/GBP currency pair with an exchange rate of 0.8800 and a position size of 100,000, the pip value would be:

pip value = (0.0001 / 0.8800) x 100,000
pip value = 11.36

Calculating Profit and Loss

Now that you know how to calculate pip values, you can use this information to calculate your potential profit and loss for each trade. To calculate your profit or loss, you need to multiply the number of pips gained or lost by the pip value of the currency pair.For example, if you bought the EUR/USD currency pair at 1.2000 and sold it at 1.2015, you would have made a profit of 15 pips. If you were trading a standard lot, your profit would be:

profit = 15 x $8.33
profit = $124.95

FAQ

Q: What is the difference between pips and points?
A: Pips and points are often used interchangeably in the forex market. However, some brokers use points to refer to a price change in the fifth decimal place, which is also known as a fractional pip.Q: Do all currency pairs have four decimal places?
A: No, some currency pairs have different decimal places. For example, the USD/JPY currency pair is quoted to two decimal places.Q: What is a pipette?
A: A pipette is a tenth of a pip, or 0.00001 in most currency pairs. Some brokers use pipettes to provide more accurate pricing.

Conclusion

Calculating pips in forex may seem complicated at first, but with practice, it will become second nature. Understanding how to calculate pips is essential for managing your risk and maximizing your profits in the forex market. Remember to adjust your position size and pip value accordingly when trading different lot sizes or cross-currency pairs. Happy trading!Terima kasih sudah membaca artikel ini. Silakan baca artikel lainnya untuk meningkatkan pengetahuanmu tentang forex trading.