Pips, also known as “percentage in point” or “price interest point,” are a unit of measurement used in trading to represent the tiniest change in the value of a currency pair. The value of a pip depends on the currencies being traded and the size of the trade.
To calculate pips, it’s important to know the following information:
The currency pair being traded (e.g. EUR/USD, GBP/JPY)
The exchange rate of the currency pair (e.g. 1.2345)
The size of the trade in lots (e.g. 0.01, 1.00)
The formula to calculate the value of a pip is as follows:
For currency pairs where the quote currency is USD:
Pip value = (0.0001 / exchange rate) x trade size in lots
For currency pairs where the quote currency isn’t USD:
Pip value = (0.0001 / exchange rate) x trade size in lots x exchange rate of the quote currency to USD
For example, let’s say you’re trading EUR/USD with an exchange rate of 1.1800 and a trade size of 0.01 lots. The pip value would be:
Pip value = (0.0001 / 1.1800) x 0.01
= 0.84 USD per pip
This means that for every pip the EUR/USD pair moves, your loss or profit would increase or decrease by 0.84 USD, depending on the direction of the trade.
Forex CFD PIPs
In CFD trading, the term “pip” is also used to represent the smallest price movement of an instrument, just like in forex trading. However, the value of a pip in CFD trading may differ from the value of a pip in forex trading, as it depends on the traded instruments.
To calculate the value of a pip in CFD trading, the following information is needed:
The instrument to be traded (e.g. stock, commodity, index)
The price or exchange rate of the instrument
The size of the trade in lots or contracts
The formula to calculate a pip, in this case, is as follows:
Pip value = (one pip / exchange rate) x trade size in contracts or lots
For example, if someone were trading a CFD on Apple stock with a price of $150 for each share, with a trade size of 100 contracts, the pip value would be:
Pip value = (0.01 / 150) x 100
= 0.0067 USD per pip
This means that for every pip the price of Apple stock moves, the loss or profit would increase or decrease by 0.0067 USD, depending on which direction the trade takes.
It’s important to note that CFD trading involves a significant amount of risk of loss. So, it’s incredibly important to understand trading strategy, as well as risk management techniques, before engaging in any trade.
Conclusion
Understanding this unit of measurement is a key skill for any prospective trader. Pips knowledge is important for business and is also a great tool for assessing market volatility. A high number of pips means the market is more volatile while a lower one indicates less volatility.
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