Thinking of trading currencies? Before you dive in, it’s important to understand a few key concepts, starting with one of the most fundamental: pips, and how to calculate pips in Forex. A pip, short for “percentage in point,” is a standard unit used to measure price movement in a currency pair. For most pairs, it’s the fourth decimal place.
But for others, like pairs involving the Japanese Yen, it’s the second decimal (0.01). The exact position depends on the currency’s value. Knowing how to calculate the value of a pip isn’t just technical trivia, but a practical skill. It helps you measure potential profit or loss, size your trades accurately, and manage risk more effectively. In this guide, we’ll walk you through how to calculate pips in Forex and share a few helpful tips to keep in mind as you build your trading strategy.
Alt-text: currency exchange process
Source: https://pixabay.com/illustrations/euro-dollar-hand-keep-948007/
Calculating Pip Value in FX Trading
Primarily, the value of a pip is not fixed for all instruments; rather it depends on the currency pair you choose, the trade size, and the exchange rate at the time of trading. When it comes to major currency pairs, those in which the US Dollar is the quote currency (the most popular one being EURUSD), the pip value is calculated by dividing one pip (0.0001) by the exchange rate, and then multiplying by the transaction size (how many lots you want to trade).
Let’s look at an example. If EURUSD is trading at 1.1200 and you wish to place a standard lot (100,000 units) on the market, the pip value would be approximately $8.93. When trading 10,000 units, the pip value will drop to $0.89.
*Remember, when it comes to Yen pairs like USDJPY, the pip value is calculated using 0.01 instead of 0.0001, since the currency pair has a smaller decimal structure.
Traders who choose to use platforms like MetaTrader or TradingView benefit from tools that calculate these values automatically. Having said that, understanding how to calculate pips in Forex manually is helpful when you do not have access to these tools.
Key Considerations for Traders
When you know how to calculate pips in Forex, you can control the risk you take per trade better. This way you can set a stop loss level that is based on the pip value, and ensure that your exposure remains within your risk tolerance.
At the same time, pip awareness can also help you get a better grasp on market volatility. Some currency pairs (like minors or exotics) post larger daily price moves. By knowing the average daily range of a pair, you have a better chance of avoiding trades during volatile periods. You can also adjust your targets more realistically, based on recent price moves.
When you trade cross-currency pairs that don’t include their account currency, the pip values may need to be converted. For example, if you want to buy the EURGBP and the trading account is denominated in USD, the profit or loss in GBP will be converted to USD based on the latest exchange rate.
Summary
Understanding how to calculate pips in Forex helps you make better decisions and, more importantly, stick to your margin of risk. Furthermore, it also encourages responsible trading, helps with position sizing, and provides deeper insight into price movements. Thankfully, finding the pip value for each currency pair no longer requires manual calculations these days. However, it is important to be aware of the mechanism behind the calculation, as it will help you gain a broader understanding and perspective.
