WHAT IS A PIP IN FOREX?
Pip stands for Point in Percentage. It is the smallest amount by which a currency quote can change. This is usually $0.0001 for US Dollar-related currency pairs, commonly referred to as 1/100th of 1%, or in other words, 1 basis point.
Having a standardised size to measure price changes across all brokers and platforms not only avoids confusion, but helps traders decide on their position sizes and minimise losses.
CALCULATING PIP VALUE AND POSITION SIZES
Knowing how to calculate pips is essential, so that you can estimate how much you could gain or lose with each price movement.
The size of the trading position will be crucial in this calculation. Assuming uniform price movements in pips, larger positions will have greater financial consequences.
Monetary Value of a Pip = Position size x 0.0001
Most major currencies are priced to 4 decimal places, except the Japanese Yen, which is only priced to two decimal places (0.01).
HOW TO CALCULATE SPREADS
Let us assume that the spot rate of the EUR/USD on your MT4 terminal is 1.1034/1.1035. This is the bid/ask quote. The difference between the bid and ask price is called the spread. Wider spreads erode profits and magnify losses, which is why investors prefer tight spreads.
FP Markets offers ECN pricing, which means that spreads go as low as 0.0 pips.
Multiplying the position size with 1 pip will show how much a pip is worth. Suppose you decide to trade one lot of the EUR/USD pair, this means you will be trading €100,000. We know that 0.0001 is the value of 1 pip for EUR/USD.
Hence, the currency value of 1 pip for 1 lot = 0.0001 x 100,000 = $10
If you buy the EUR/USD at 1.10345 and later close your position by selling 1 lot at 1.10355, then the difference between the two will be:
1.10355 – 1.10345 = 0.00010
This is 1 pip. So, essentially you make a profit of $10.
IMPORTANCE OF A PIP VALUE CALCULATOR
The difference in pips can be determined with a pip value calculator. Also referred to as a pip difference calculator, this is a useful tool for making informed decisions. By simply entering the currency pair you wish to trade, the lot size and pip amount, you can get an idea of whether a trade is worth the risk.