To manage risk more effectively, it is important to know the pip value of each position in the currency of your trading account.
In this article I would like to provide some information on the calculation of the pip value in forex trading.
Forex traders are regularly faced with the question how to calculate the position size in their trading if they wish to stick to specific risk parameters.
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What is the pip value in currency trading?
A pip is usually the fourth decimal place with most currency pairs. If the EUR/USD currency pair were to go up from 1.2810 to 1.2850, it would have thus moved by 40 pips.
Only with the yen pairs (e.g. USD/JPY), a pip is the second decimal place. If the EUR/JPY pair were to move from 138.51 to 138.21, it would have thus fallen by 30 pips.
As forex currency pairs are always quoted in the second currency, the trading profit or loss will also be denominated in this currency.
Profits or losses will thus be denominated in dollars with the EUR/USD currency pair, and in Swiss francs with the USD/CHF currency pair.
Calculating the pip value in forex trading
Calculating the pip value in forex trading is very easy to start with insofar as it equals the fourth decimal place, meaning that the pip value for EUR/USD would amount to USD 0.0001.
If we want to calculate our risk in a forex trade now, for example, all we need to do is to multiply the pip value with the number of risked pips.
Example based on EUR/USD
We buy EUR/USD at 1.2830 and our stop loss is at 1.2790. Our risk hence extends to 40 pips.
If we are trading a so-called standard lot, i.e. buying USD 100,000, our risk amounts to 100,000 * 0.0001 * 40 = USD 400.
In other words: the pip value for a standard lot amounts to USD 10.
As our account will usually be denominated in euros, we will then only need to convert the pip value to euro.
In our current example: USD 10 * 0.7795 = € 7.795 if 0.7795 is the exchange rate for USD 1 into euros.
Example based on AUD/NZD
We are buying at a rate of 1.1085 with a stop loss at 1.1050. Our risk hence amounts to 35 pips.
The AUD/NZD currency pair is traded in NZD, with AUD representing the so-called base currency, and NZD the so-called counter currency.
We are once more trading a standard lot of NZD 100,000 and would like to know what our risk amounts to.
The equation would be: 100,000 * 0.0001 * 35 = NZD 350.
With a standard lot, each pip thus stands for a value change of NZD 10.
All we need now is the NZD to EUR conversion rate, which is currently at 0.6291, meaning that we would be running a risk of NZD 350 * 0.6291 = EUR 220.18.
I hope this article has succeeded in making the calculation of the pip value in forex trading a little clearer.
If you have any questions about calculating the pip value or would like to comment on this article, please use the comment function at the bottom of this page.
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