How to Calculate Pips on FOREX Trades
A pip -- which is an acronym for "percentage in point" -- functions as the measure of profits and losses when trading foreign currency exchange, or Forex, rates. Forex brokers allow traders to scale the size of trades to match available account funds, so converting pips to dollars depends on the "lot" size you select to trade.
Small Increments Facilitate Trading Small Value Changes
- In financial jargon, one point is 1 percent, so a percentage in point, or pip, will be 1 percent of 1 percent or 1/100th of a percent. For all currency quotes except for the Japanese yen, one pip is a single number change at the fourth decimal place. For example, if the euro to U.S. dollar -- EUR/USD -- rate is at 1.3654, a move to 1.3655 would be a one pip change. If the euro climbs a penny to 1.3754, the currency moved 100 pips. Since the yen is valued at close to 100 to the dollar, one yen pip is at the second decimal place.
Dollar Value Depends on Lot Size
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- The common lot sizes in Forex are 1,000, 10,000 and 100,000 of the second listed currency in a trading pair. For pairs with the U.S. dollar second, each pip is worth $0.10, $1 and $10 for the different lot sizes, respectively. When the USD is first in the pair, divide one by the exchange rate to get the per-pip value. For example, the USD/CAD rate is $1.0667. Dividing the rate into one produces a 10,000 lot size pip value of $0.94 in USD. A 100,000 lot pip is worth $9.38. For pairs not including the USD, a pip is worth the USD exchange rate of the second listed currency. As an example, for the EUR/GBP, the GBP/USD quote is $1.7158; in USD terms, each EUR/GBP pip on a 10,000 lot is worth $1.72.
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