What Is Pip Value? Calculating Your Profits and Losses in Forex
We have already introduced the term “pip.” But is its value different depending on the currency pair we are trading? The short answer is “yes”. Let’s try to calculate the value of one pip for the EUR/USD pair, currently trading at 1.1500:
- 1 pip: A change of 0.0001 in the exchange rate (e.g., from 1.1500 to 1.1501 or 1.1499).
- 1 pip value: 0.0001 / 1.1500 = €0.000087.
However, this value should be converted to the account currency and adjusted for the traded volume. Let’s assume that our account is denominated in dollars, and we have opened a one-mini lot (10,000 units) long position in EUR/USD. To determine what the equity change will be for a change of one pip, we need to convert the above value (€0.000087) to the account currency and multiply it by the traded volume.
So, €0.000087 х 1.1500 х 10,000 = 1 dollar. Our account will increase or decrease by $1 whenever the exchange rate changes by one pip.
It is evident that when the quote currency (the second one in the pair) is identical to the account currency (USD), one pip will always equal one unit of it (1 dollar per mini lot in this case).
Example:
- Account currency: EUR
- Lot: Standard (100,000 units)
- Traded pair: USD/JPY
- Current exchange rate USD/JPY: 121.15
- Current exchange rate EUR/USD: 1.2000
1 pip value per 100,000 units traded = (0.01 / 121.15) х 100,000 = $8.25
* One pip in Japanese yen pairs is reflected in the second decimal place
To understand the impact of a one-pip movement in the USD/JPY pair on our euro account, we need to convert dollars into euros at the current rate: $8.25 / 1.2000 = €6.875. Changing one pip in USD/JPY will increase/decrease our account by €6.875.
Conclusion
The value of a pip varies with the currency pair being traded. Calculating pip value is crucial for effective position management. The primary goal is to understand the impact of a one-pip change and adjust risk accordingly.
