After understanding the pips in foreign exchange trading, you should also pay attention to the value of each pip, referred to as the pip value. Since foreign exchange trading involves different currency pairs, investors will find that the profit and loss of each pip fluctuation of some currency pairs is different from that of other currency pairs. Therefore, before entering the market, it is also necessary to more accurately calculate the actual profit and loss brought by each pip fluctuation to avoid losing the budget when deploying.
Before calculating the pip value, we need to understand the calculation of trading profit and loss. Let's take a look at EUR/USD and USD/JPY as an example. When the market price of EUR/USD=1.1600, investors buy 10,000 euros against the US dollar, which is actually equivalent to 11,600 US dollars. If EUR/USD eventually rises to 1.1605, 10,000 euros are equivalent to 11,605 US dollars. If investors choose to sell euros to close the position, the profit is (11,605-11,600) US dollars = 5 US dollars.
Thus, in a 5-pip move, the investor earns $5. (When holding 10,000 euros, each pip is worth $1.)
When the market price of USD/JPY=106.00, investors buy 10,000 USD against JPY, which is actually equivalent to 1,060,000 JPY. If USD/JPY eventually rises to 106.08, 10,000 USD is equivalent to 1,060,800 JPY. If investors choose to sell USD to close the position, the profit is (1,060,800-1,060,000) JPY = 800 JPY.
It can be seen that in an 8-point fluctuation, the investor made a profit of 800 yen. (When holding 10,000 US dollars, each pip is worth 100 yen) (The problem is that 100 yen needs to be converted back to US dollars, that is, 100 yen / 106.08 current price = 0.9427 US dollars)
The investor's actual profit on USD/JPY is: 8 pips x 0.9427 USD = 7.54 USD.
Further understanding, the pip value in foreign exchange trading is not fixed, it is based on several factors:
Using the above example, if the investor holds 100,000 units instead of 10,000 units, the value of each pip will be 10 times greater.
When the right-hand currency of a currency pair is not USD, the profit and loss needs to be converted. For currency pairs such as USD/CAD, USD/CHF, EUR/GBP, AUD/JPY, USD/CNH, the profit and loss are not settled in USD, and ultimately need to be settled at the current market price. The conversion process is the reason why the point value is not fixed.
Most foreign exchange trading accounts are denominated in US dollars, so the above situation occurs. However, if some accounts are denominated in currencies such as euros or Japanese yen, the converted point value will also be different.
Fourth, the denominated currency changes. Since the market price is constantly changing, for example, in the above example, if USD/JPY rises to 110, the converted point value (100 yen/110 current price = 0.91 US dollars) is lower.
Please note that since different brokers provide different services, some point values may vary due to different product types and contract size settings. Investors need to read the product details carefully to understand the details.
All financial products traded on margin carry a high degree of risk to your capital. They are not suited to all investors and you can lose more than your initial deposit. Please ensure that you fully understand the risks involved, and seek independent advice if necessary.