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Calculating Pip Value Demystified

April 19, 2012 | Comments: 0 | Views: 87

Knowing to what extent the price change is going to affect your position and account is essential for a trader. For that you have to calculate the value of one pip of price movement. There are lots of examples on the 'net, and some of them look rather confusing. While in fact calculating pip value is very easy to do.

First of all you should know by now that the currency specified first in exchange rates is base currency, and the one in the second position is called terms currency. You always buy or sell the base currency. And the value of pip you will get is in terms currency. Multiply how much you buy or sell with a pip size: say for 6 mini-lots of NZDUSD pip value is 6'000NZD * 0.0001 = 6USD/pip; or for 2 full lots of USDJPY it is 200'000USD * 0.01 = 2'000JPY/pip.

Sometimes you are fine with what you get in a previous step. Specifically, this is the case when terms currency of your trade is what you want to see. For example, you trade NZDUSD and want to get pip value in dollars, then you got 6USD per pip already and don't need to go any further.

But you may want to see this value expressed in a currency other than the terms currency. Say you want to know how your account would be affected by 1 pip price movement and you made a deposit in pounds. In this case you'll have to take exchange rate of the pair including GBP (or other currency you are interested in) and the terms currency of your trade (USD for NZDUSD, or JPY for USDJPY). Say rates are 1.6977GBPUSD and 161.50GBPJPY.

Next step is to look if our currency (i.e. GBP) is base or terms currency in these rates. If it is base currency we divide the above result (i.e. pip value expressed in terms currency) with the rate: 6USD/1.6977GBPUSD = 3.53GBP or 2000JPY/161.50GBPJPY = 12.38GBP.

If it is terms currency though, we multiply the above result with the rate. Say our account denominated in swiss francs (instead of pounds). USDCHF rate is 1.0624, CHFJPY is 89.61. Then 1 pip value of the two trades above will be expressed in francs as: 6USD * 1.0624 USDCHF = 6.37CHF (CHF is terms currency here), but 2000JPY / 89.61 CHFJPY = 22.32CHF (CHF is base currency in this pair).

In case the last two examples still leave you wondering, try to look at them in the following way. 89.61CHFJPY means we pay 89.61 units of terms currency (JPY) for 1 unit of base currency (CHF). That is 89.61 JPY per CHF, or mathematically speaking 89.61 JPY/CHF. (Yes, the actual meaning of exchange rates is exactly opposite to the order we see in forex symbols; it is even more confusing since sometimes symbols include slash, like CHF/JPY). Now if you substitute this mathematical meaning into formula from the last paragraph, you'll notice that one of the currency symbols within the fraction will get reduced and another one will end up in the numerator position: 2000 * JPY / 89.61 * JPY / CHF = (2000 / 89.61) * CHF = 22.32CHF. Thus you've got exactly what it says - 22.32 swiss francs (per pip of 2 full lots of USDJPY).

A word from author. I am a Forex enthusiast and private trader striving to apply my 10+ years of professional programming expertise to automated trading. Read more about Forex trading and MetaTrader programming on my blog at

Source: EzineArticles
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