How to Calculate Forex Pip Value

 

We’re all used to dollars and cents (as you’re used to the currency in your country), but when you enter the Forex market, you need to learn a new term: Pip. What does it mean and how do you calculate a Forex pip value?

Pip

The pip is defined as the smallest increment a currency pair can take. For instance, for the USD/CAD pair, a pip is 0.0001. For the USD/JPY pair a pip is 0.01. A pip is also known as a point.

Recently, many Forex brokers changed their price quotes from a 4 digit quote to a 5 digits one. This practically changed the smallest increment a currency pair can move, but the pips have remained the same.

There used to be a trick that you could use with 5 digits quote to know what a pip is, but it doesn’t work everytime anymore:

The trick is simple: take the exchange rate and count 5 digits backwards. For instance, today, the USD/CAD is at 1.04328 (a 5 digit quote). Count 5 digits from the first: 1, 0, 4, 3, 2. The 2 is the 5th digit in the quote and it’s at the 4th position after the decimal point, so a pip for the USD/CAD is 0.0001. This is also true for the EUR/GBP, EUR/USD and a lot of other currency pairs.

For the USD/JPY it’s a different story. The USD/JPY exchange rate was historically over 100 Yen for a Dollar. This is why the Pip value for the USD/JPY is 0.01. However, the USD has lost value in relation to the Yen, so it’s value today stands at 86.693. Even so, a pip is still 0.01, because this used to be the place of the 5th currency in the quote. This is also true for the CHF/JPY and other currencies involving the Yen.

Another way to know is to simply find out if your broker is running 4 digit quotes (in which case the pip is at the last digit) or 5 digit quotes (in which case the pip is at the position before last).

How to calculate the value of a pip

A pip is always calculated by the base currency (the second one in the pair). This is multiplied by the lot size with which you’re trading. For the standard lot which has 100,000 units, the pip value for the USD/CAD is 10 CAD or $9.59 (by today’s exchange rate of 1.04328 USD/CAD). This is the calculation: 10 CAD /1.04328 = $9.59.

For the EUR/USD the value of a pip is $10 which is pretty simple. For all standard lots when the USD is the base currency a pip is $10.

For a mini lot with only 10,000 units, the Pip will be 10 times less, or just $1 for the EUR/USD and $0.959 for the USD/CAD.

It’s important to be able caluclate the value of a Forex pip. After all, this is the most basic term in the Forex trading world.

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