Every financial instrument has its own measurement unit to track the value of price changes. In forex, we use pips (shorthand for ‘percentage in point’). Understanding the concept of forex trading pips is the simple part.
However, knowing how much they are worth precisely without getting mind-boggled is another story. Fortunately, we have a pip calculator or pip value calculator for this job. Let’s go through what forex pips are and how to calculate pips with this tool.
What are pips in forex trading?
Of course, we first need to understand what a pip is before using a pip calculator. A pip describes the slightest variance in a forex price quote to the right of the decimal point. This is the fourth place for most pairs, except for JPY-based pairs, where it is two places. Let us look at examples of each market below:
If EUR/USD went from 1.13631 to 1.13641, this would be one pip change. Notice that we disregard the fifth digit after the decimal, referred to as a pipette. The standard is to use pips in forex and not pipettes.
In the second scenario, we see a pip difference if the yen went from 113.82 to 113.83. Simple enough, right?
Counting pips is straightforward. The more important part is learning how to assign monetary values.
How to calculate pip value in forex
There are tens of currency pairs, each with their own forex pip values. A pip on the euro will not be worth the same as one on GBP/NZD. So, how do you work it out?
We have two formulas:
- 0.0001 X lot size X conversion price (for most forex pairs)
- 0.01 X lot size X conversion price (for JPY and metal-based markets)
We measure the lot size according to a standardized set of units of the base currency:
- Standard lot size = 100 000 units (1)
- Mini lot size = 10 000 units (0.1)
- Micro lot size = 1 000 units (0.01)
- Nano lot size =100 units (0.001)
The conversion price is the exchange rate of the traded pair, which you would align with your account’s base currency. For example, let’s assume you wished to know the pip value for USD/JPY, and your account was in USD.
You would refer to the USD/JPY price. However, you would look at the EUR/JPY exchange rate if you were trading with a EUR-denominated account (and so on).
Let’s look at two examples.
1. Account currency: USD
Currency pair: USD/CAD
Unit size: 100 000
Exchange rate (USD/CAD) = 1.3552
Here, the pip value is equal to $7.38:
$7.38 = 0.0001 * 100 000 * 1.3552
2. Account currency: EUR
Currency pair: CHF/JPY
Unit size: 50 000
Exchange rate (EUR/JPY) = 143.725
Here, the pip value is equal to €3.48:
€3.48 = 0.01 * 50 000 * 143.725
Fortunately, you don’t need to worry about the math using our forex pip calculator.
The benefits of a pips calculator (and how to use it)
A pips counter will save you time manually calculating this stuff. Time is of the essence, and you want to take advantage of all opportunities without a pen-and-paper approach.
Also, pip calculators will be based on real-time exchange rates, meaning that you will always receive accurate forex pip values.
Yet, the deeper question here is why you should understand pips or pip calculators at all. The main reason, is of course, that we need something to measure exchange rate changes in the FX market.
We know that prices fluctuate each second. Pips in forex represent these changes with the finest degree of accuracy.
Understanding these values leads us to the second benefit, which is tracking our wins and losses in actual monetary terms. Saying a pair moved 10 pips from your entry is meaningless without attaching a relatable dollar value. 10 pips could mean $100 for one trader and $1000 for another.
Lastly, understanding how to calculate pips is beneficial for comparing the extent of spreads across different brokers. Sometimes, depending on your trading capital, a slight 2 pip difference in particular pairs may be worth tens or hundreds of dollars.
How to use a forex pips calculator
Using a pip value calculator or pip calculator is a piece of cake. You only need to know the following:
- Account currency
- Lot size
- Traded pair
You will automatically receive a pip value once you input this data. Our pip calculator will have a list of base currencies you can choose from, so you don’t need to do any conversions from scratch.
Along with a lot size calculator, a pip calculator is an essential tool for money management in forex.
Whether you are a scalper, day trader, or swing trader, every chartist should have a firm grasp on using a pip calculator.