Pips in Forex market is the value or points used in calculating profits or loss. It is used to measure the amount of change in a currency pair exchange rate, which may result to either profit or loss. Pip stands for “price interest point”.
HOW CAN ONE DETERMINE A PIP VALUE?
The value of each pip is determined by four basic factors, namely
- The currency pair involved
- The exchange rate of the currency pair being traded
- The size of the trade, which could be a micro lot or a mini lot
- The dominating currency of the Forex account
Based on these factors, the slightest changes can make a notable change on the value of the open position.
HOW TO CALCULATE PROFIT OR LOSS INVOLVING TWO DIFFERENT CURRENCIES
Assume that a trade of $250,000 involving USD/CAD, which resulted to the gain of 20pips, was closed at 1.0568. How do you calculate the profit or loss of this transaction in USD?
- 1 pip = 0.0001
- Closing exchange rate = 1.0568
- Trade amount = $250,000
- Total pips gained = 20 pips
- First, let the Forex account involved be a USD dominated account, there is need to find out the number of CAD each pip represents. Note that 1 pip = 0.0001 for currency pairs displayed in four decimal places; except the Yen based currency pairs which are displayed in two decimal places. To determine how much each CAD each pip represent, multiply one pip by the trading amount
250,000 X 0.0001 = 25 CAD for each pip
- To find out how much USD each pip stand for, divide the cost of each pip in CAD with the closing exchange rate
25 ÷ 1.0568 = 23.66 USD per pip
- To calculate the profit or loss in this trade, multiply the total pips gained by the value of each pip in USD
20 X 23.66 = 473.2 USD profit
WHAT IS A PIP SPREAD?
A pip spread, or simply a spread, is the difference between the bid price and the ask price in a Forex trade. This implies that whatever a Forex trader gets as profit or loss in a trade is the same as a spread.