The concept of pip value can be difficult to understand when dealing with foreign exchange (FX). The fourth decimal place in most currency pairs is referred to as a “pip,” which is a unit of measurement for the movement of currencies. For instance, a fluctuation of one pip would mean the exchange rate for EUR/USD moving from 1.1015 to 1.1016.
The majority of brokers offer fractional pip pricing, which means that you will also see a fifth decimal place in prices, such as 1.10165. The value 5 in this example corresponds to five-tenths of a pip, also known as five pipettes.
The amount of profit or loss produced by a one-pip change depends not only on the currency pair being traded but also on the currency used to fund your trading account. Pip value is important since it has an impact on risk. If you are unable to accurately calculate the optimum position size for trade because you are unaware of the value of a pip, you run the danger of placing an excessive or insufficient amount of capital at risk on the trade.
How to Determine the Value of a Pip When Trading in a USD Account
The United States dollar is involved in the currency pairs that see the largest volume of trading everywhere on the globe (USD). If you have U.S. dollars in your trading account, the value of a pip will not vary when USD is the second currency listed in a currency pair because this value is fixed.
The following are the fixed pip amounts:
- A normal lot costs USD $10, which is equivalent to 100,000 units of cash.
- A mini lot, which is equal to 10,000 units of cash, costs one dollar USD.
- A micro lot, which is equivalent to one thousand units of currency, costs $0.10 USD.
- A nano lot costs $0.01 USD, and one nano lot is equal to 100 units of currency.
These pip values apply to any pair where the USD is in the second spot, such as the euro/U.S. dollar (EUR/USD), the British pound/U.S. dollar (GBP/USD), the Australian dollar/U.S. dollar (AUD/USD), and the New Zealand dollar/U.S. dollar (NZD/USD).
In the event that the US dollar is not listed second,
Divide the pip amounts shown above by the current exchange rate for USD/XXX.
For instance, to calculate the point value of a standard lot for the US dollar/Canadian dollar (USD/CAD) currency pair when trading in a USD account, divide USD $10 by the USD/CAD rate. This will give you the pip value of the standard lot. The typical lot pip value is $7.46 if the USD/CAD exchange rate is 1.34105, which can be calculated by dividing $10 by 1.34105.
Calculating the Value of a Pip for an Account Other Than USD
No matter what currency is used to finance the account, the value of each pip is always the same when the second currency in a pair is that currency.
If you have an account denominated in Canadian dollars (CAD), for instance, the price of each pip in any pair denominated in XXX and CAD, such as the USD/CAD pair, will be the same. The price of a standard lot is CAD $10, the price of a mini lot is CAD $1, and the price of a micro lot is CAD $0.10.
When the Canadian dollar is displayed first, the value of a pip can be calculated by dividing the set pip rate by the exchange rate. For instance, if the current exchange rate for the Canadian dollar to the Swiss franc (CAD/CHF) is 0.70347, then the value of a pip for a micro lot is 1.42 Canadian dollars ($1 Canadian divided by 0.70347).
After dividing the result by the current exchange rate, you must then multiply the total by 100 if the combination includes the Japanese yen (JPY), as in the case of the CAD/JPY currency pair. This is due to the fact that in the case of the yen, a pip corresponds to the second place after the decimal (0.01) rather than the fourth place (0.0001).
For instance, to determine the standard pip value, for instance, if the CAD/JPY exchange rate is now trading at 79.941, you would first divide CAD $10 by 79.941, then multiply the result by 100 to arrive at a value of CAD $12.51 per pip.
Follow these steps for each of the currencies in your account to find out the pip values for currency pairs that include those currencies.
The Value of One-Hundredth of a Cent in Other Currency Pairs
There are several currency pairs that do not contain the currency of your account. Even though you have a USD account, you might be interested in trading EUR/GBP instead. The following is an explanation of how to calculate the pip value for currency pairs that do not contain your account currency.
If a person has an account in a particular currency, then they will always be required to pay in that currency.
3 As an illustration, we are aware that the value of one point in the currency pair EUR/GBP corresponds to GBP10 for a standard lot. This was covered earlier in the article. The next step is to change 10 GBP into the currency that you normally use. If your account is in US dollars, divide £10 by the current exchange rate between the two currencies. If the exchange rate is 0.77025, then one pip is equal to $12.98 U.S. dollars.
If you can only locate a “reverse” or reciprocal quote, such as the GBP/USD rate of 1.3152, then divide 1 by the rate to get 0.76034.5. If you can only find a “forward” quote, then you are out of luck. That exchange rate is from USD to GBP. After that, you can proceed with the calculation from before.
Remember that a standard lot for this pair is valued at CAD $10 for a person with a CAD account. If your account currency is the euro, and you want to know the pip value of the AUD/CAD, remember that a typical lot for this pair is valued at CAD $10 for a person with a CAD account.
That CAD $10 should be converted to EUR by dividing it by the current rate of EUR/CAD. In the event that the exchange rate is 1.48132, the standard lot pip value will be EUR6.75.
Always keep in mind which currency is supplying the value of the pip; in this case, the second currency (YYY). When you have that information, you can convert the fixed pip value in that currency to your own by dividing it by XXX/YYY, where XXX is the currency of your own account.
Questions That Are Typically Asked (FAQs)
In terms of trading, what is a pip?
A “price interest point” (often abbreviated as “pip”) is a measure of the degree to which the exchange rate for a given currency pair has changed. One pip equals.01 percent of the value of the majority of currency pairs (four decimal places right of the whole number).
Although some brokerages measure to one additional decimal place to allow for fractional pip changes, a point of interest, or pip, is typically understood to be the lowest price change that is feasible.
How can one determine the value of a pip for a particular currency?
Your broker is the most trustworthy source of information regarding the trading goods that they provide for you to choose from. Because some brokers offer fractional pips (sometimes known as “pipettes”), you will need to determine the smallest movement that your broker will measure in order to trade effectively.