Pip value is quite a confusing topic for the majority of beginners. While probably all traders are aware of what pip is, a few know how to calculate pip value or how it works under real market conditions. It is a metric that shows how much loss or profit a pip movement can deliver depending on the currency pair you trade. In other words, we can say that pip value mainly relies on the asset you trade. Besides, different currencies require different approaches to pip value calculation.
Today, we will discuss what pip value is and how it works. Additionally, we will review several real market examples as well as ways to calculate it when trading in USD. Please, note that different currencies require different calculation methodology.
A pip is a baseline element of trading. As a trader, you purchase and sell currencies with value that is dependent on one another. In other words, the value of one currency is in close relation with the value of the other one. In the professional trading world, the process is described as exchange quotes dissemination through bid and ask price.
The exchange rate moves all the time. To measure those movements, we use pips. The majority of currency pairs we trade are quoted to the maximum of 4 decimal places. It means that the slightest rate movement or value change for the underlying currency pair is equal to 1 pip.
Example: let’s say, you trade USD/CAD. It means you are eager to purchase USD and sell CAD at the same time. Oppositely, we will have a trader who controversially wants to sell USD and buy CAD. This is where the term “pip” may also refer to spreads between the ask and bid price. It can also be used to indicate the amount of loss or gain that can be generated from a trade.
As stated earlier the methodology of calculating pip value depends on the currency pair you trade. The one you use for USD-based pairs will not work for non-USD instruments. This fact may look quite confusing for beginners. The good news is that beginner traders can benefit from online pip value calculator software provided by either brokers or niche-specific websites.
While ISD is one of the most-heavily traded instruments, we will review the example of how to calculate pip value on a USD-based account. Calculation will not be needed if the U.S. dollar is listed second in a pair. This is where the value is fixed and it makes no sense to calculate it.
Here is the table with a fixed pip value:
|Currency Amount||Lot Size||Fixed Pip Value|
|USD$10||Standard lot||100,000 units|
|USD$1||Mini lot||10,000 units|
|USD$0.10||Micro lot||1,000 units|
|USD$0.01||Nano lot||100 units|
Please, note, that the fixed pip value above refers to any USD-based currency pair where the U.S. dollar is listed second.
If USD is listed first in the currency pair, you will need to calculate pip value using the following formula: take fixed pip value from the box above and divide it by the USD/XXX rate where XXX is the currency listed second in the pair.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.