A pip is one of the most important concepts of Forex. Despite that, it is a concept that is misunderstood by most of the traders and they do not know how to calculate it.
A pip is sometimes a minor fluctuation in the currency rate exchange in the Forex market. In Forex exchange 1 pip is equal to .0001. The price of currencies also determines the pip value. For example, the price of yen is very small as compared to other currencies so in the case of yen 1 pip equals to .01 yen.
We can understand this example by comparing currency pairs. For example the value of the EUR/Us currency pair was 1.4075 in the morning and it closed at 1. 4080, then there was a rise in 50 pips in these currency pairs. Similarly, for Dollar/ Yen currency pair, the business started at 56.76 and closed at 57 so there was change in price of the pair by 24 pips.
The meaning of pip and point in the Forex market is same but in the stock exchange they mean completely different things. In the New York stock exchange 1pip is equivalent to 1 cent and 1 point means a difference of 100 pips or 1 Us dollar. SO as you can see, the concept of pip and point is quite different in the stock exchange whereas it is the same in the Forex market.
It is also essential to learn the methodology of converting the given measure into a particular currency. If we study the dollar, then calculations will give us accurate values of profit or loss here, the Forex calculator can come in handy. However, it is good to know a simple formula too. It can help you to calculate your losses or profits in a specific trade.
First type of Calculation
Calculations involving the US dollar, the, a pip is equivalent to product of a lot size and the smallest change in price divided by the current price of the currency.
Consider that the size of USD/JPY financial instrument is 1 lot, the current price of the currency pair is 65.17 whereas the smallest change in the price is 0.02. As a result, a pip price is the following:
· 1 pip is equal 100.00 * 0.02 /65.17 = Your answer in US dollars
Second Type of Calculation
In a financial instrument containing an indirect quotation, quoted currency is the dollar. Here, a pip relates to the product of a lot size and the smallest change in price.
If the size of the EUR/USD financial instrument is 1 lot and the smallest change in price is 0.0003.
1 pip for a particular currency will come out to be 100,000 * 0.0003 = your answer in dollars.
Third Type of calculation
Cross rates are mostly measured by this methodology. US dollars are not included in these measurements.
If we consider the EUR/JPY pair having a lot size of 100,000. The smallest change in price is 0.03 and the current pair’s price is 116.46. The main currency instrument is EUR/USD with the price of 1.500. Here 1 pip will come out to be 100,000 *0.03*1.5000*116.50 = your answer in dollars.