Forex Pips
By: Anne Durrell
Forex pips are the tiny increments of value or pricing that you see listed for each currency. A pip is always counted as being the last decimal place in any price quotation you see.
When you're calculating your potential profit or loss from any trade, then a pip is the amount by which you measure the difference between cost and receipt for your trades.
If you were planning to trade US dollars for British pounds, then your currency pairing will look as follows:
USD/GBP
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The first currency in the pairing is the USD, so we already know that $1 US dollar is worth $1 US dollar. It's the value of the second currency you want to determine. When you look at price quotes, you'll notice only the second currency's price as compared to the first will be shown.
USD/GBP: 1.5882
To find the value of the forex pips for this pairing, then you'll use need to begin with the last decimal place of this quotation as a single figure, so that will look like this:
0.0001
To determine the forex pips value, take this decimal point figure and then divide it by the exchange rate:
0.0001 / 1.5882 = 0.0000629644
So the value of your forex pips if you were trading US dollars for British pounds would be that crazy long number I've shown above. Don't start worrying that you'll be doing math with a special financial calculator every day to try to figure out how to earn a few extra dollars.
Your forex pips are actually calculated for you inside your forex trading account automatically. You'll notice that each time the currency values change, the pip values will alter at the same time.
Calculating Profit and Loss from Forex Pips
Those tiny little numbers we calculated earlier will be greatly enlarged simply because your forex trades are leveraged. This means for every dollar you invest out of your own account, you're leveraging at a rate of usually 100:1
In our original example, we looked at trading USD/GBP at 1.5882
So the calculation now looks like this:
0.0001 x 1.5582 = 0.0000629644
0.0000629644 x $100,000 = $6.29
So you stand to make $6.29 per pip if the price goes up. Let's assume the price changes and it moves from your original 1.5882 up to 1.5902. The difference in forex pips is 0.0020 or 20 pips, so your potential profit for this trade would be:
$6.29 x 20 pips = $125.80
Now all these calculations might look a bit boring and even a little confusing, but you seriously won't need to panic about calculating forex pips. Simply log into your forex trading account and your profit or loss is worked out for you.
Also, check out my other guide on forex trading hours and learning the stock market
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