In yesterday’s article we explained what a pip was – feel free to read the article again if you’re still confused.
Today we look at working out PIP values – that is, how much will a movement in PIPs be worth. e.g PIP values are where you are able to say “if it moves 1 pip I’ll make a profit of $10″.
Believe it or not, this is not a complicated thing to work out.
First of all, we must learn the terms base currency and quote currency. Base currency is the first quoted unit and quote currency is the second quoted unit – e.g. in USD/JPY, USD is the base currency and JPY the quote currency. The currency pair shows how much of the quote currency is needed to purchase one unit of the base currency i.e. if the USD/JPY is 120.75, then you would need 120.75 yen to purchase 1 USD.
So when calculating PIP values, in a currency pair the base currency (first quoted currency) will always be worth $1 per 10,000 currency units.
-
- e.g in the GBP/USD pair a movement of 1 pip is worth $1 per £10,000 pounds.
- Or, in the EUR/USD pair, a movement of 1 pip is worth $1 per 10,000 Euros.
- So if you’d invested 30,000 Euros and there was a movement of 3 pips, you’d profit by $9 (3 pips x $3 profit per pip movement).
Of course, things won’t always be that simple when calculating the PIP value. For starters, I’d recommend using a free online calculator such as the one found here.
But if you want to work it out yourself (I’d recommend setting up an Excel spreadsheet to calculate the values) then the formula is as follows :
(one pip, with proper decimal placement/currency exchange rate) x (Notional Amount)
Using USDJPY as an example, this yields:
(.01/130.46) x USD10,000 = $0.77
or 77 cents per pip
Using EURUSD as an example, we have:
(.0001/.8942) x EUR10,000 = EUR 1.1183
But if you want the pip value in USD, you then must multiply EUR1.1183 x (EURUSD exchange rate):
EUR 1.1183 x .8942 = $1.00
It should be said, that that is not the only formula out there. But, I thought it was the easiest one for anyone starting out in Forex Trading.
So there we have it, PIP values. Hopefully I’ve shed some light on the issue …
but if I’ve just confused you more then why not look into using an automated Forex Trading system such as Forex Funnel. Forex Funnel trades on the USDJPY currency pair and makes trading currency a much simpler experience. Read our Forex Funnel review to find out more.
Related Forex Trading Software Articles :
If you enjoyed this post, make sure you subscribe to my RSS feed!
[...] now you know what a PIP is and are also quite good at working out how to calculate PIP values (or at least, have found a good online calculator to use). In today’s lesson we learn about [...]