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A to Z Academy / 4. Practical Guide to Forex Trading

23.What is a pip value?

November 12, 2020 00:42 AM

Introduction

Forex Pip Value is an important concept in forex trading. It defines the difference between the current value of a currency pair and the midpoint of the previous trading day’s range.

Forex pip values are updated twice per minute and are used to calculate the margin requirements for a given trade.

What is Forex Pip Value?

Forex pip value is the price of 1 unit of forex currency for another currency. It is used to calculate the profit or loss of a trade. Forex pip value is an important Forex trading concept.

It is used when calculating the profit or loss of a trade. This calculation determines the size of the position taken in a currency pair which is then calculated as a percentage.

Pip value in Forex

Price interest points or “Pip” in forex trading are where traders should pay attention, as each pip or pip value will affect the final calculation for the price. Because forex trading involves different currency pairs, investors will find that the profit and loss for each pip of some currency pairs are different from those of others. Therefore, it is necessary for investors to accurately calculate the actual profit and loss per pip before placing a trade order to avoid mistaken strategies. 

 

Before knowing the pip value, we must understand the calculation logic behind trading profit and loss. For example, let’s look at EUR/USD and USD/JPY. When an investor buys 10,000 euros against the dollar at the market price EUR/USD = 1.1600, by logic, he needs to pay 11,600 dollars. If EUR/USD eventually rises to 1.1605, 10,000 euros will be equivalent to 11,605 dollars, and if the investor chooses to sell the euros in hand, the profit is (11605–11600) dollars = 5 USD. 

 

Thus, for the 5-pips movement, the investor gains $5. (Each pip is equivalent to $1 when holding 10,000 euros.) 

 

When an investor buys 10,000 dollars against yen at the market price of USD/JPY = 106.00, by logic, he pays 1060000 yen. If USD/JPY finally rises to 106.08, that is, 10,000 dollars will be equivalent to 1060800 yen, and if the investor chooses to sell dollars to close out his position, the profit is (1060800–1060000) yen = 800 yen. 

 

Thus, for the 8-pips movement in USD/JPY, investors made an 800 yen profit. (Each pip is equivalent to 100 yen when holding 10,000 dollars.) (The problem is, 100 yen needs to be converted back into dollar term, so 100 yen / 106.08 current price = 0.9427 dollars.) 

 

The investor’s actual profit in USD/JPY is eight pips x 0.9427 = 7.54 dollars. 

 

The Importance of Forex Pip Value

Forex trading can be a very profitable endeavor, but it is also risky. One of the most important factors that determine risk is the pip value.

Pip values are the prices at which orders are executed in forex markets. They are used to calculate margin requirements and can significantly impact a trader’s profitability. Pip values are also important to traders because they determine the amount of money placed on a particular market. If a trader places too much money on a price, he/she could lose all of it. The pip value is calculated by dividing the price of a currency pair by the number of pips that make up a single unit. For example, if you are trading the EUR/USD, one pip equals 1. The pip value of the EUR USD is therefore 1.

Pip values are determined by the market and can vary daily and even hour to hour.

Why is the pip value not fixed?

Studying further, the pip value in forex trading will not be fixed, mainly due to several factors: 

Firstly, the size of the contract. In the above example, if an investor holds 100,000 units instead of 10,000, the value of each pip will be 10 times greater. 

Secondly, the counter (quote) currency of the pairs. When the traded pair’s counter currency (the right-hand side) is not the dollar, the profit and loss need to be converted. In currency pairs such as USD/CAD, USD/CHF, EUR/GBP, AUD/JPY, and USD/CNH, the profit and loss are not settled in dollar terms, so eventually, the P&L would be converted at the current market price. Such conversion is the reason for the change of the pip value, corresponding to the market price change. 

Thirdly, the dollar-denominated account. Most forex trading accounts are denominated in dollar terms, just as in the case above. However, if some accounts are denominated in currencies such as the euro or yen, the converted pip value will differ. 

Lastly, price changes of the counter currency. Since the market price is changing all the time, for the above example of yen, if USD/JPY rises to 110, then the converted pip value (100 yen /110 current price =0.91 dollar) is lower. 

It is important to note that as different brokers offer different services, the pip value may vary depending on the type of trading product and the contract size. Investors should read the product details carefully before trading. 

How to Calculate Forex Pip Value?

Traders and investors use pip values to determine if they’re making a profitable investment in forex. Forex pip values are the amount of currency that changes hands in a single transaction. For example, if a trader buys $10,000 worth of currency and sells it for $10,000, the pip value is $0.01. If a trader buys $100 worth of currency and sells it for $110, the pip value is still only $0.

Read more on : How to calculate Pip Value.

Common Pitfalls When Calculating Forex Pip Values:

Forex trading can be a very profitable investment, but it can also be risky. When calculating the pip value of an option, traders must be aware of common pitfalls that could lead to losses. Here are six tips for avoiding Forex pip values traps:

  1. Make sure you understand all the risks associated with each option.
  2. Calculate the pip value accurately and consider all relevant factors.
  3. Use accurate calculator programs or online calculators to make your calculations safe and accurate.
  4. Only trade options that have a fair price and good liquidity.
  5. Always carefully monitor your forex positions, and if you experience any unusual movements, close out the position immediately!

Conclusion:

In conclusion, the pip value is a key measure of how volatile the foreign exchange market is. Knowing this information can help traders make informed decisions when trading.

Knowing the pip value can also be useful in determining when to sell or buy a currency pair. Given all of this information, it is important for traders to stay up-to-date with changes in the pip value so that they can make informed decisions and max out their profits.

Next Article:  24. Why do the spreads sometimes become wider or narrower?

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What is a Pip Value and Why is Pip Floating? | ZFX

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Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted in accordance with this article. Please be firm in your thinking and do the corresponding risk control.

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