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Explained for beginner: Pip Value
Source: | Author:finance-102 | Date2023-02-02 | 250 Views | Share:
In forex trading, currency pairs are quoted with four decimal places, and the smallest change in price is referred to as a "pip". The value of a pip depends on the currency pair being traded and the size of the trade (lot size). For example, a change in price from 1.2050 to 1.2051 would be considered a one pip move.

In forex trading, currency pairs are quoted with four decimal places, and the smallest change in price is referred to as a "pip". The value of a pip depends on the currency pair being traded and the size of the trade (lot size). For example, a change in price from 1.2050 to 1.2051 would be considered a one pip move.

 

Pip value refers to the value assigned to a single pip, or point in percentage, in a currency pair in forex trading. It is used to calculate the profit or loss from a trade, as well as the margin requirement. The pip value varies depending on the base currency, the exchange rate, and the size of the trade (lot size).

 

To calculate the pip value, you can use the following formula:

 

Pip value = (One Pip / Exchange Rate) * Lot Size

 

Where:

 

One Pip: is the increment of price movement of a currency pair, usually 0.0001 for most currency pairs with 4 decimal places.

Exchange Rate: The exchange rate is the rate at which one currency can be exchanged for another. The base currency is the first currency listed in a currency pair, and the quote currency is the second currency listed.

Lot Size: is the size of the trade expressed in units of the base currency.


For example, if you have a trade with a lot size of 100,000 units of the base currency, and the exchange rate is 1.20, the pip value would be:

 

(0.0001 / 1.20) * 100,000 = 8.33

 

This means that a single pip moves in either direction would result in a profit or loss of 8.33 units of the quote currency.

 

It's important to note that the pip value can vary depending on the base currency of the trade. For example, if you are trading USD/CAD, the pip value will be different than if you are trading EUR/USD. Additionally, the pip value will also change as the exchange rate changes. This is why it's important for forex traders to regularly calculate the pip value to determine their profit or loss from a trade, as well as the margin requirement.