• Pip Value Formula is one of the most basic concepts that you need to learn when you enter the world of forex trading. It plays a significant role in assisting traders to manage risk, calculate profits and losses, and make informed decisions. If you are trading manually or through the medium of a trading platform, understanding pip value is non-negotiable. However, a pip value calculator can simplify this procedure, but knowing the underlying formula enhances your trading foundation. In this blog, we will break down what pips are, why pip value matters, and how to use the pip value formula.  

What is pip in forex trading  

• A pip in forex trading refers to “percentage in point” or “price interest point”; it is a standardized unit that measures the smallest price movement in a currency pair, as per the market convention. For most of the major currency pairs, a pip is equivalent to 0.0001 for one-hundredth of one percent (1/100 of 1%), and it is located at the fourth decimal place of the exchange rate. For instance, if the EUR/USD shifts from 1.1000 to 1.001, then this movement is one pip. However, there are exceptions in every case, for currency pairs consisting of Japanese yen, a pip is usually the second decimal place, showcasing the lower value of the yen relative to other major currencies. As per Pepperstone for most of the currency pairs quoted in USD, the worth of a pip is $10 per standard lot, and $1 per mini lot.  

Why is the pip value significant in forex trading? 

• In forex trading pip represents a movement, while the pip value tells you the worth of that movement in your trading account’s currency. To simplify it, pip value refers to the amount of money obtained or lost per pip movement in the trade. For instance, in a standard lot size (100,000) units, one pip is EUR/USD, which usually equals $10. But if you change the lot of a currency pair, then the pip value changes too. By understanding the formula of pip value, traders will be able to: 

• Decide the accurate position size for each trade on the basis of their risk tolerance and the size of the account.  

• Calculate the risk-to-reward ratio of traders, assisting them to determine whether a trade is worth taking.  

• Set correct stop-loss and take-profit levels; this ensures that potential losses are mitigated, and profits are targeted as per their trading strategy.  

• Pip value also offers a standardized method to compare price fluctuations across different currency pairs, even though the actual value of a pip can differ based on the pair, trade size, as well as the exchange rate. This standardization is significant for maintaining consistency in trading decisions and performance evaluation.  

Explain the pip value formula  

• In forex trading, pip value refers to the monetary worth of one pip movement in a currency pair for a specific trade. Calculating pip value is significant to manage risks, position sizing, as well as evaluating profit and loss.  

• The general formula for calculating pip value is: 

• Pip value Pip size/exchange rate * trade size 

• Pip size: For most of the pairs is 0.0001, and for JPY pairs, it is 0.01 

• Exchange rate: It refers to the current rate of the currency pair.  

• Trade size: It is the number of base currency units in the positions (for instance, 100,000 is for a standard lot, 10,000 for a mini lot) 

Step-by-step calculation  

Step 1 

• For pairs where your account currency is the quote currency, such as USD in EUR/USD 

• Pip value Trade size * pip size 

• For instance, in EUR/USD, if there are 10,000 units, then the pip value is 10,000 * 0.0001 = $2.  

Step 2  

• For pairs where the account currency is the base currency, such as USD in USD/CAD 

• Pip value = Trade size * pip size/ exchange rate.  

• For instance, for 10,000 units in USD/CAD at 1.2829, the pip value is 100,000 * 0.0001/1.2829, which is $ 7.79  

Step 3 

• For accounts where the account currency is not in the pair, convert the pip value into your account currency by using the relevant exchange rate.  

Common mistake beginners make while calculating pip  

Not verifying base and quote currency 

• Failing to identify which currency is the base and which is the quote can impact the formula of the pip value. This will result in using the wrong calculation method, especially for pairs where the account currency is not the quote currency.  

Overlooking market conditions 

• If you are not considering changes in volatility can liquitdiy, it will impact your pip values, especially during the high-impact news, or in a low-liquidity session. Beginners should also adjust their calculations to showcase present market conditions.  

Confusing decimal places 

• Most of the time, beginners miscalculate which decimal place represents a pip, especially with different currency pairs. For most of the currency pairs, a pip is at the fourth decimal place (0.0001), while for the JPY, it is at the second decimal place (0.01). Mistaking a pip can lead to major miscalculations.  

Not cross-verifying calculations 

• Sometimes, beginners also skip verifying their pip calculations with a pip calculator or by a manual review, which increases the likelihood of mistakes. Automated tools, along with calculation logs, are needed to ensure accuracy.  

Ignoring the lot size proportionality  

• Beginners usually forget that the value of a pip changes proportionally with the lot size. Calculating pip value for one and then trading a different lot size without making any adjustments to the calculation, which will lead to unexpected profits and losses.  

Tips for managing risk by using the pip value  

Calculate risk per trade 

• Before entering into a trade, you need to determine the maximum amount that you are willing to risk on a single trade, usually a small percentage of your account balance (like 1-2%). You can use the pip value as well as your stop-loss distance in pips to calculate the correct position size, making sure your potential loss is not more than your risk tolerance.  

Adapt to market volatility 

• In volatile market conditions, you can opt to reduce your position size or widen your stop-loss to consider larger price swings, but always evaluate your pip value and risk accordingly.  

Review and adjust  

• As your account balance, style of trading, and conditions of your market change, you need to recalculate the pip value as well as adjust your risk parameters to stay aligned with your trading strategies.  

Set an effective stop loss 

• You can use pip value to set stop-loss and take profit levels that match your risk-reward ratio and trading plan. For instance, if your pip value is $1 and your stop loss is 50 pips, then your risk per trade will be $50 for one mini lot.  

Conclusion  

• Traders can feel empowered and make the right decisions when they have mastered the pip value formula, which will lead them to trade accurately and control their risk exposure. While it is easy to depend on tools such as a pip value calculator or built-in features on a trading platform. To take your forex trading journey to the next level, you can consider using services and tools from Thaurus. Thaurus offers robust solutions for forex traders, including analytics, educational content, as well as trading strategy tools. Our resources are created to help you understand difficult concepts such as pip value, marginal requirements, and technical evaluation in a beginner-friendly atmosphere.  

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