Pip Value and Calculating Profits and Losses

Overview
We have previously explained the meaning of pips, but how do we calculate them? In this lesson, we will be tackling how we calculate pips, which will, in turn, help up calculate our profits and losses.
outcome

Lot/contract sizes, and calculating pip value.

Reading time
6 minutes
Experience Level
  • beginner Beginner

Lot Size / Contract Size 


A lot is a unit that measures the size of positions in Forex. The table below shows the common lot sizes and their actual size in currency terms:  


Lot

Units (In base currency)

Standard
100,000
Mini
10,000
Micro
1,000
Nano
100


The actual position size is always expressed in terms of the base currency, which is the currency mentioned first in the pair. For example, one EUR/USD standard lot is worth 100,000 Euros, not 100,000 Dollars, because the base currency in this pair is the Euro. 


Calculating Pip Value


A pip is the change in the fourth decimal point in any currency pair not containing the JPY, and the change in the second decimal point in pairs containing the JPY.


Depending on the positions of the USD in the pair, currencies are divided into direct pairs, where the Dollar is the base currency, and indirect pairs, where the Dollar is the counter currency.  


In direct pairs, the price quoted is the amount of foreign currency that one Dollar can be exchanged for. For example, a USD/JPY quote of 108.00 means that 1 US Dollar can be exchanged for 108 Japanese Yens.


For indirect pairs, the price quoted is the number of Dollars that one foreign currency can be exchanged for. For example, a EUR/USD quote of 1.1750 means that one Euro can be exchanged for 1 US Dollar, 17 cents, and half a cent. 


For indirect pairs, the pip value when trading one standard lot is always USD 10. Why is that? 


Because the profit/loss (P/L) equation always gives you the profit or loss in terms of the counter (quote) currency, not the base currency. So, for indirect pairs, the result is already in Dollars, and it does not need to be converted. 


Of course, the profit or loss is the difference between the sell price and the buy price, multiplied by the size of the position. This is true no matter what currency you are trading, and no matter if you are going long or short. This simple equation is always correct.


Note:

 

Positive numbers indicate a profit, while negative numbers indicate a loss. 

Depending on your broker and account type, there may be other expenses, like commissions, or overnight interest known as “rollover”.


Now, since a pip is the fourth decimal, and since the standard lot size is 100,000, then a profit or loss of 1 pip is equal to:


0.0001 x 100,000 = USD 10 


This is always the case, no matter what rate the pair is trading at.


However, for direct pairs, the pip value is not fixed. Why is that? Remember when we said that the result of the P/L equation is in quote currency? Here, the quote currency is not the Dollar, so we have to convert the result of the equation from the quote currency itself, for example (JPY, CHF, or CAD) to USD, and in order to do that, we will need to use the exchange rate between the two.


For example, one USD/CAD pip is still worth 10 Dollars, but not US Dollars. Since the quote currency in this pair is the Canadian Dollar, then these are 10 Canadian dollars. 


To convert them to US Dollars, we need to use the exchange rate between the two. 

This means that the pip value when trading USD/CAD at 1.30, is not the same as the pip value when trading the USD/CAD at 1.35. In the former, the CAD is more valuable, and therefore, 10 Canadian Dollars are worth more than the latter.


The equation to convert P/L from quote currency to Dollars is this:


P/L in USD = P/L in quote currency / exchange rate


And so:


Pip value in USD = Pip value in quote currency / exchange rate 


In both examples of the exchange rates above, the pip value is calculated as follows:


When USD/CAD is trading at 1.30:

Pip value in USD = (100,000 x 0.0001) / 1.30 = 7.69 USD


When USD/CAD is trading at 1.35:

Pip value in USD = (100,000 x 0.0001) / 1.35 = 7.41 USD


The equation is the same even for JPY:

Assuming that USD/JPY is trading at 108.90:


Pip value in USD = (100,000 x 0.01) / 108.90 = 9.18 USD


Surely you have noted that a quicker way of calculating pip value for direct pairs (except JPY) is to divide 10 by the exchange rate:


If USD/CHF is trading at 0.9435:

Pip Value = 10 / 0.9435 = 10.60 USD


For JPY, we should divide 1000 by the exchange rate, as in this example:


USD/JPY exchange rate is 108.75


Pip value = 1000 /108.75 = 9.20 USD


In recent years, the fractional pip was introduced. A fractional pip is an additional digit that was added to the quote of each currency. This means that a fractional pip is equal to 1/10 of a pip, and that is the number appearing in the fifth decimal (third decimal for JPY pairs).


Comprehensive examples


A trader bought five standard lots of EUR/USD at 1.1608 and closed the position at 1.1628:


The long way:


Size of the position: 5 x 100,000 = 500,000 Euros


Sell price – buy price = 1.1628 – 1.1608 = 0.0020


P/L = Size of the position x price difference

                  = 500,000 x 0.0020 

                  = 1,000 USD


The short way:


10 USD x 20 pips x 5 lots = 1,000 USD


A trader sold three USD/CHF standard lots at 0.9355 and closed them at 0.9363: 


The long way:


Size of the position: 3 x 100,000 = 300,000 US Dollars


Sell price – buy price = 0.9355 – 0.9363 = - 0.00008


P/L = Size of the position x price difference

                  = 300,000 x 0.0011 

                  = 330 Swiss Francs 

Dollar P/L = Foreign currency P/L / Exchange rate at closing time 

                 = 330 Swiss Francs / 0.9366

                 = 352.34 USD     


The short way:


(10 / 0.9366) x 11 pips x 3 lots = 352.34 USD


Lesson Complete!

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