What Is Pip In Forex Trading & How to Calculate Pip In Forex Trading
“Pip” stands for “Percentage in point.” When it comes to the Forex Trading, the increase and decrease of pips represent the profit and loss in your trade.To trade forex, you need to understand what is pip in forex trading and how to calculate its value for trade.
When currencies are quoted, they are mainly quoted with the fourth decimal price.
Below is the example of Pip quoted in EURUSD.
1.0701 , The 1 is the fourth decimal number quoted for EUR/USD. If EUR/USD moves from 1.0701 to 1.0702 , We will consider it 1 pip move upside.If move downside towards 1.0700 , We will consider it 1 pip move downside.
However, some currency pairs and commodities are quoted in 2 decimal numbers such as USD/JPY, Gold, Oil etc
114.24 , The 4 is the second decimal number which represents Pip in USD/JPY Currency Pair.If USD/JPY moves from 114.24 to 114.25 , We will consider it 1 pip move upside.If move downside towards 114.23 , We will consider it 1 pip move downside.
1168.60, The 0 is the second decimal number which represents Pip in Gold or XAUUSD.If XAU/USD ( Gold ) moves from 1168.60 to 1168.61, We will consider it 1 pip move upside.If move downside towards 1168.59, We will consider it 1 pip move downside.
How To Calculate Pip In
Calculation, the value of Pip , is easy. Let me explain you in a simple formula.
If one pip is equal to 0.0001 ( 4th Decimal Figure )
Dividing 0.0001 by an exchange rate 1.0701 = 0.0000934
We get 0.0000934 Euro ( pip value )
Let’s turn this into Forex Deal. Selling 100000 Euro in a current exchange rate of EUR/USD 1.0701
100000 X 0.0000934 = 9.34 Euro Pip Value ( Equals to 10 $ )
80 X 9.34 = 747 Euro ( 800 $ )
In above example, we made 80 pip profit in selling euro against the dollar.
USD/JPY Pip Calculation
USD/JPY is calculated in 2nd decimal number such as 114.32
In the above example of USD/JPY quoted picture.The second decimal number 114.32 is considered a Pip.If USDJPY moves upside 114.33, we will consider it 1 pip move upside. Whereas if USDJPY move downside towards 114.31, It will consider 1 pip downside movement.
Buying 100000$ worth of USD against JPY with an exchange rate of 114.32.
0.01/114.32 X 100000$ = 8.74$
8.74$ is the pip value for USDJPY
After holding a couple of days, When we decide to close the deal, the exchange rate become 114.24.
114.32-114.24= -8 Pip
8X8.74= 69.92$ ( We lose 69.92$ in this trade )
These are the explanation of what is pip in forex trading with some examples.We will cover some more basics in next couple of chapters.If there is any confusion or you want to ask anything, Please feel free to comment below.We will try to answer all of your questions to clear the concept.