How to determine the value of a PIPs in forex buy and sell trades

Forex rates may only be quoted in pips.

Foreign exchange traders buy and sell currencies, profiting on changes in the exchange rate. Exchange rates are expressed as the number of units of one type of currency that you can get for one unit of another type of currency. For example, you might get 0.7615 British pounds for one U.S. dollar. Rates change in very small amounts, in the hundredths and thousandths, which are the last two decimal places in the quote. This would be 0.0015 in the number 0.7615. These two places are known as "pips," and while they look tiny, currencies typically trade in lots of 100,000 or more. That means these seemingly small pips can be worth a lot, so it's vital to understand just how much money they represent.

Instructions

U.S. Dollar as Base Currency

1. Find the current exchange rate for your currency pair; for example: USD/CAN 1.0145/1.0147. This means you can buy one Canadian dollar with 1.0145 U.S. dollars or sell one CAN for 1.0147 USD. The difference between the two quotes, referred to as the spread, is 2 pips. This is how your dealer makes money.

2. Determine your lot size. While a standard lot size is 100,000 units, it is increasingly common to trade in lots of 10,000, 1,000 or even 100. For this example, say you are trading 100,000 units.

3. Divide one pip -- 0.0001 in this case -- by the exchange rate. In the example, if you're buying CAN, this is 0.0001 divided by 1.0145, or 0.00009857. If you're selling CAN, it's 0.0001 divided by 1.0147, or 0.00009855.

4. Multiply the adjusted rate by your lot size. For buying CAN, this is 0.00009857 times 100,000, or 9.87. When selling, it's 0.00009857 times 100,000, or 9.86. This means that for your lot, every single pip change is just under 10 USD.

Other Currency as Base

1. Calculate the pip value as previously instructed. This time, however, you'll have the second currency as the base. For example: EUR/CAN 1.4560 yields a pip value of 6.87 euros.

2. Locate the exchange rate for the base currency to U.S. dollars, such as EUR/USD 1.2603.

3. Divide your original pip value by the exchange rate: 6.87 EUR divided by 1.2603 EUR per USD equals 5.45 USD per CAN in this transaction.

Tips & Warnings

• Note that in most cases where the U.S. dollar is quoted last (EUR/USD), the pip value will be equal to 1 USD per 10,000 lot, or 10 USD per 100,000.

• Forex trading is extremely risky. Traders should use caution. Become educated and trade in a practice account before investing real money. Never invest more than you can afford to lose.

References

• Baby Pips: Lots, Leverage, and Profit and Loss
• "Futures"; Mathematics of Pip Production; Abe Cofnas; October 18,2007
• Financial Web: Calculating a Forex Pip Value

Resources

• Baby Pips: Pip Value Calculator