When trading foreign exchange, we usually use pips to describe the fluctuation of exchange rates, and we also often use pips to calculate the profit and loss of positions. This article will introduce what pips are, and how to use pips to calculate the pip value and position profit/loss.
What are Pips?
A pip is a unit (usually 0.0001, or the smallest unit) that measures the increase or decrease of an exchange rate in a foreign exchange currency pair.
For gold quotes, they are usually quoted to 2 decimal places (different traders have different quotation methods). For example, the price of $1969.12 in the figure below, and the so-called 1 point is taken from the last decimal place of the quote.
What is Pips Value?
Pips Value refers to the profit or loss of a position caused by the fluctuation of one pip in foreign exchange transactions. Before calculating the pip value, we need to understand the meaning of the quotation.
Examples of currency pair quotes: EURUSD (Euro/US Dollar), GBPUSD (British Pound/US Dollar), USDJPY (US Dollar/Japanese Yen).
- The first one is the base currency and the second one is the settlement currency.
- In foreign exchange trading, a standard lot is 100,000 units of the base currency.
The following point value calculation formula:
One currency unit x number of lots held x 0.0001 = point value (in settlement currency)
Calculation method of point value and position floating profit and loss
Here are a few examples of calculating pip value and floating profit and loss:
Example 1
EURUSD (Euro/US Dollar) rose from 1.1701 to 1.1706, with 1 lot held.
Pip Value: 100,000 x 1 x 0.0001 = 10 USD
Fluctuation point: 1.1706-1.1701=0.0005 = +5 pips
Floating profit/loss: 10 USD (pip value) x 5 (pips) = +50 USD
Example 2
GBPUSD (U.S. Pound to U.S. Dollar) fell from 1.2906 to 1.2901, with 1 lot held.
Pip Value: 100,000 x 1 x 0.0001 = 10 USD
Fluctuation point: 1.2901-1.2906 = -0.0005 = -5 pips
Floating profit/loss: 10 USD (pip value) x -5 (pip) = -50 USD
Example 3
USD/JPY rose from 104.01 to 104.09, with the holding volume being 0.5 lots.
Pip value: 100,000 x 0.5 x 0.01 = 500 JPY ( *Note that the pip unit for this currency pair is 0.01 )
Fluctuation point: 104.09-104.01=0.08= +8 pips
Floating profit or loss: 500 yen (pip value) x 8 (pips) = +4,000 yen
Floating profit and loss conversion: 4000 yen / 104.09 (current price) = +38.43 US dollars
Generally speaking, the fourth decimal place of a currency pair is 1 pip. However, for the mainstream currency, the Japanese yen, due to its currency value, the second decimal place of the Japanese yen is 1 pip.
Example 4
Gold per ounce (XAU/USD) rose from $1956.20 to $1969.12, with 1 lot held
Point value: 100 x 1 x 0.01 = 1 USD (one lot of gold is 100 ounces)
Fluctuation points: 1969.12 - 1956.20 = 12.92 = +1292 pips
Floating profit or loss: 1 USD (pip value) x 1292 (pips) = +1292 USD
Why is calculating pip value so important?
So why do we need to calculate pips? Because after active calculation, knowing the size of profit and loss can help us plan trading deployment in advance, measure the potential risk of loss, and evaluate whether the trading plan is feasible, whether the risk is within the tolerable range, or whether to adjust the position size.
How to calculate profit/loss in advance?
There are thousands of foreign exchange products, and different traders have different contract sizes. Although it is the same point, the disguised point value may be different. However, the calculation principle is the same, and now many traders have provided trading calculators, so investors no longer need to work hard to calculate manually. Just visit the trader's website, enter the product type, and the expected entry and exit price, and the system will calculate it for you.
The quote will have one more decimal place
The current development of information technology allows the world to process larger traffic flows faster, and the market quotes can be more detailed. Therefore, most foreign exchange brokers can quote 1/10 pips, which is ten times smaller, due to competition.
