When it comes to foreign exchange, calculating your profits and losses is a key component. You may hear the term “pip” when trading, so we’ve put together a handy guide on the basics of pips and how you can calculate your profit or loss.
What is a “pip”?
The term “pip” stands for Percentage in Point (as well as Price Interest Point) and is a unit of measurement used to show the change in the given exchange rate between two currencies (also known as currency movement). When trading in the forex market, you will find that currency pairs are usually quoted to four decimal place. In these instances, the pip is the fourth decimal place: for example, if AUD/USD moves from 0.75036 to 0.75037, this equals one pip movement.
For currency pairs that go to two decimal points, such as yen, the pip equals 0.01. You might also find that some brokers offer fractional pip pricing. These fractional pips called “pipettes” and are available where you see a fifth decimal place such as 0.00001.
Forex traders will usually use pips as a reference for gains and losses. For example, a trader who says, “I made 100 pips on the trade” made a profit worth 100 pips, but the actual cash amount will depend on the currency. A solid understanding of pips and what they represent allows traders to successfully manage their trading strategy.
How to calculate pip value
The monetary value of a pip depends on three elements:
- The currency of the pair you are trading
- The size of the trade
- The exchange rate
Also, remember that:
1 lot = 100,000 units
1 pip = 10 units
So, calculating pip value can be achieved using this formula:
Pip Value = (One Pip/Exchange Rate) x Lot Size
A practical example of this might look like:
One Pip: 0.0001
Account Base Currency: AUD
Currency Pair: AUD/USD
Exchange Rate: 0.75232 (AUD/USD)
Lot Size: 1 Lot
Pip Value = 0.0001/0.75232 x 1
Each Pip is worth: $AUD132.92
How to calculate forex profit or loss
Now that you know how to calculate your pip, determining profit or loss of a position is fairly straightforward. In order to do this, you will need:
- The position size
- The number of pips the price has moved
Your profit or loss will equate to pip movement x position size (long or short). For example, imagine the price for AUD/USD jumps 10 pips. To determine if this is a profit or loss, you need to know if your position is long or short. In the case of a long position, there is a profit if the prices move up, and a loss if the prices move down. For short positions, there is a loss if prices move up and a profit is the prices move down.
Calculating your pip value can be a time-consuming and confusing endeavour, but it doesn’t have to be. ForexCT is the number one choice of margin forex and CFD traders around the world, so get in touch with us today for everything you need to trade with confidence.