Pip is one word you’ll likely hear in any conversation about forex trading. One of the first subjects you’ll learn in most forex trading courses is just what a pip is and how to calculate pips.
A pip is an acronym for point in percentage and it represents the smallest whole unit of movement in a currency pair’s exchange rate.
What Does Pip Value Mean?
The “pip value” of a given trading position is its change in value due to a one-pip move in the relevant foreign exchange rate, all other factors remaining equal. The currency that a pip’s value is expressed in should be your account’s base currency. This means the numeric pip value of a position can vary depending on which base currency you specify when you open an account.
If you trade in an account denominated in a specific currency, the pip value for currency pairs that do not contain your accounting currency are subject to an additional exchange rate. This is due to the fact that you need to convert pip value into your accounting currency to compare it with the pip value of your other positions.
In practice, this means that the numerical pip value for a trade in EUR/GBP, for example, will generally be higher than for pairs with the U.S. dollar as the base currency because the pound sterling (GBP) trades at a higher relative value than the U.S. dollar.
This also means that trading EUR/GBP in a single full lot of 100,000 euros can have a more capital-intensive effect on the margin required to hold that position than, for example, trading a one lot of $100,000 of the U.S. dollar against the Mexican peso or USD/MXN. Due to the Mexican peso’s low value, the pip value for a $100,000 or full lot trade in USD/MXN is only about $0.53 compared to $13.17 for a full lot of 100,000 euros in EUR/GBP.
Step-By-Step Calculation with Examples
Step 1: Determine the pip size. It is 0.0001 for all currency pairs other than those that contain the Japanese yen when it is 0.01 due to the relatively low value of the Japanese yen.
Step 2: Determine the exchange rate.
Step 3: Use this general formula for calculating the pip value for a particular position size:
Pip value = (pip size / exchange rate) x position size
Step 4: Convert the pip value into your accounting currency using the prevailing exchange rate.
Pip Value Calculations Examples
For pairs with The U.S. dollar as the counter currency
The same pip values apply to all currency pairs with the U.S. dollar traded as the counter currency in an account denominated in U.S. dollars. Major currency pairs such as EUR/USD, GBP/USD, AUD/USD and NZD/USD all have the U.S. dollar as the counter currency.
Basically, the movement of a currency pair such as EUR/USD from 1.2000 to 1.2001 would represent a one pip rise in the exchange rate, so the pip size in EUR/USD is 0.0001. This one pip movement would equal a shift in value of $0.10 on a micro lot of 1,000 euros, $1 on a mini lot of 10,000 euros and $10 for a full lot of 100,000 euros. Those would be your pip values when trading in a U.S. dollar denominated account.
Therefore, to calculate the pip value for EUR/USD when the pip size is 0.0001, the spot rate is 1.12034 and you are trading a position size of €100,000, you would plug that information into the formula shown in Step 3 above as follows:
(0.0001 / 1.12034) X €100,000 = €8.925861791956013
Performing that calculation yields the pip value of €8.925861791956013. If you then want to calculate the U.S. dollar amount of this pip value, you must take the pip value of €8.925861791956013 and convert it into U.S. dollars by multiplying it by the EUR/USD exchange rate of 1.12034 as follows:
€8.925861791956013 X 1.12034 $/€ = $10
Therefore, the pip value for a position size of €100,000 when the EUR/USD exchange rate is trading at 1.12034 is €8.925861791956013 in a euro-denominated account or $10 in an account denominated in U.S. dollars.
For pairs with the U.S. dollar as the U.S. dollar as the base currency
Most other currency pairs have the U.S. dollar as the base currency, such as USD/JPY and USD/CAD, for example, and they have different pip values. To calculate the pip value where the USD is the base currency when trading in a U.S. dollar-denominated account, you need to divide the position size by the exchange rate.
For example, if the USD/CAD exchange rate is trading at 1.3000 and you have a $100,000 position, then the pip value is one pip or 0.0001 x $100,000 equals CAD$10 since the Canadian dollar is the counter currency.
If you then wanted to convert that pip value into U.S. dollars, you would need to divide by the USD/CAD exchange rate of 1.3000 Canadian dollars per U.S. dollar, thereby yielding a USD pip value for that $100,000 position of $7.692307692307692.
Computing pip values for cross currency pairs
To find the pip value of a currency pair where neither currency is the account currency, for example, when you are trading the EUR/GBP cross currency pair in a U.S. dollar-denominated account, you multiply the standard 10 pip value per full lot by the counter currency/account currency exchange rate, or GBP/USD in this example. If the GBP/USD rate is 1.3000, that gives you a pip value of 10 x 1.3000 or $13 for a EUR/GBP full lot position of 100,000 euros.
Pip value calculation shortcuts
In general, if you trade in an account denominated in a particular currency and the currency the account is denominated in is the counter currency of a currency pair, then a short cut to the pip value calculation exists that is rather easy to remember. Basically, positions in that pair will have a fixed pip value of 0.10, 1 or 10 counter currency units respectively, depending on if you are trading a mini, micro or full lot.
For example, if your trading account with an online broker is funded with U.S. dollars, then any currency pair with the USD as the counter currency, such as EUR/USD, GBP/USD, AUD/USD or NZD/USD, will have a pip value of $0.10 for a micro lot of 1,000 base currency units, $1 for a mini lot of 10,000 base currency units or $10 for a full lot of 100,000 base currency units.
To find the pip value when the USD is listed as the base currency, as in USD/JPY or USD/CAD, for an account denominated in U.S. dollars, divide the above-listed standard pip values per lot by the relevant exchange rate.
Thus, if you are trading a full lot of $100,000 in the USD/CAD pair, then you divide the standard 10 pip value per full lot by the USD/CAD exchange rate. If the USD/CAD pair is trading at 1.3400, you will arrive at the correct pip value of 10 / 1.3400 = $7.462686567164179 or $7.46 per full lot when trading in an account denominated in U.S. dollars.
How Is Pip Value Used in Forex Trading?
Pip values give you a useful sense of the risk involved and margin required per pip when taking a position in currency pairs of similar volatility levels. Without performing a precise calculation of the pip value in a currency pair, an accurate assessment of the risk you are taking by holding a position in a given currency pair cannot be made.
In addition, since forex transactions are typically leveraged, the pip value of positions gets multiplied by the amount of leverage used. By knowing the pip value of a currency pair, you can use money management techniques to calculate the ideal position size for any trade within the limits of the size of your account and your risk tolerance. Without this knowledge, you might wind up taking either too much or too little risk on a trade.
Start Building Your Trading Plan
In order to build a comprehensive and effective trading plan, incorporate sound money-management techniques that include position sizing.
Knowing the pip value of each currency pair you trade or plan on trading expressed in your account currency gives you a much more precise assessment of how many pips of risk you are taking in any given currency pair.
Pip value also helps you assess if that position risk you have or are planning to take is affordable and aligned with your risk appetite and account size.