Pip is a well-known term in the foreign exchange market that stands for Percentage in Point. It is a significant exchange unit in an exchange rate of a currency pair. Most of the major currencies in forex markets are traditionally priced at four decimal places, and a pip is one unit of the four.
If you are a forex trader who has just joined the industry, you must know how to calculate pips for many reasons. For instance, Pips reference gains or losses and help calculate rates for traders. So do not stop reading if you also want to know the correct method of calculating pips, as this article will teach it all.
How to calculate pips in general
You can calculate the value of pip by dividing 1/10000 or 0.0001 by the exchange rate. For instance, you are a trader who wants to purchase a USD/CAD pair. Hence you would be purchasing US dollars while selling Canadian dollars.
Now that you have a basic idea, let us jump into a step-by-step guide for calculating pips.
Steps to calculate pips.
Determine the pipe size. It is 0.0001 for all currency pairs except for those that obtain Japanese yen when it is 0.01 because of the low value of the Japanese yen.
Determine the exchange rate
The general formula of pip is: Pip value = (pip size / exchange rate) x position size
Hence make use of this formula to find out the correct pip value for particular position size.
Lastly, convert the value of pip into your accounting currency using the prevailing exchange rate. And that is it, and you are all done calculating the pips.
Calculating pip values for cross currency pairs
To find out the value of a currency pair where neither the currency is the account currency, you have to multiply the standard ten IP values per full lot by the opposite currency exchange rate.
Usage of pip value in forex trading
The value of the pip gives you a sense of the risk involved margin asked per pip when obtaining a position in currency pairs that hold similar volatility.
Thus, one can accurately analyze the risk they are taking by holding a position in any specific currency pair without performing the precise calculation of the pip value in the currency pair.
In a nutshell, it is important to know pips’ value for a forex trader as it helps to assess the risk one would take by holding a position in any specific way. Hence, we have mentioned the way to calculate it above.
Nonetheles, remember that this will only benefit you if you have joined an efficient forex broker such as etoro.
Etoro is a renowned forex brokerage house that holds many forex trading accounts, each with a specific sum as the minimum deposit. Hence, one can check for different etoro minimum deposit to select an account according to their affordability.