In Forex trading the concept of pip values is important. A pip is the value that indicates the movement of price of one currency against another. Pip values are of foremost importance to investors, as these indicate the profit margins that will be gained through the currency trades. Pip values are in a constant state of flux; inevitably so because of the fluid nature of the Forex market. A pip is generally calculated in units of 0.0001 or 0.01%, so if a currency moves from the value of 1.2440 to 1.2355, it is said to have moved by 5 pips.
When looking at currency pairs, calculating pip values is easier from the quote currency point of view. Taking a look at currency pairs of JPY/USD, CHF/USD, or GBP/USD, where the US Dollar is the quote currency, we can find out the pip value quite easily, which will be $10, according to current exchange rates. This is done by looking at the quote of the pair. For example, if you look at GBP/USD, the quote is 1.9730, which means 1 UK pound is worth 1.9730 US dollars. In currency trading, there are standard lot sizes, which are usually 100,000. So, 100,000 UK pounds will be worth 197,300 US dollars. Now if the pip value moves up by 1, to make the GBP/USD 1.9731 and the 100,000 UK pounds will be equivalent to 197,310 US dollars. So if you are trading for JPY/USD and the market moves by 10 pips in your favor, you will make a profit of 100 US dollars.
If the US dollar is the base currency in a pair, in the quote of USD/GBP of 0.6439, the value of 1 US dollar is worth 0.6439 UK pounds, which means that 100,000 US dollars is worth 64,390 UK pounds. Now if the price moves up by 1 pip, then USD/GBP will be 0.6440, indicating that 100,000 US dollars would equal 64,400 UK pounds now. In this trading scenario, a progression of 1 pip would equal a movement of 10 UK pounds, which when converted to US dollars results in a pip value of 15.53 US dollars, found by 10/0.6440.
We have used the standard trading lot with the USD as the quote currency with a pip value of $10 in our calculations when the USD is the base currency, the pip value will change according to the current market quote price.
Here are the Numbers
Example 1: GBPUSD – Here the Quote Currency is GBP and the Base Currency is USD.
Assume current price is 1.9730. This means that 1GBP = 1.9730USD. And for a standard contract size of 100,000, 100,000GBP = 197,300USD.
If the exchange price moves up 1 pip to 1.9731 then now 100,000GBP = 197,310USD.
So that’s a profit or loss of 10USD, depending on whether you were long or short.
Example 2: USDGBP – Here the Quote Currency is USD and the Base Currency is GBP.
Assume current price is 0.6438. This means that 1USD = 0.6438GBP. And for a standard contract size of 100,000, 100,000USD = 64,380GBP.
If the exchange price moves up 1 pip to 0.6439 then now 100,000USD = 64,390GBP.
So that’s a profit or loss of 10GBP, depending on whether you were long or short. Notice how the profit or loss is always in the Base Currency (the second currency in the pair). If our trading account was in USD, then we’d then need to convert this 10GBP to USD by dividing it by the current exchange rate i.e. 0.6439. So that’s 10GBP/0.6439 = 15.53USD.
Not so difficult??
