Members area
When it comes to forex trading, the topic of pip value usually leads to some confusion and a general lack of understanding as a trading tool. If you are serious about trading and are not looking forward to losing all your money in the first few trades, you must ensure that you fully understand the risks involved in any given trade, and in order to do that, you need to have at least a basic understanding of what pips are and how they play into the world of forex trading. A pip, short for price interest point, is essentially a unit of measurement that describes the change in value between two different currencies. For example, if you’re trading EUR/USD and it moves from 1.2060 to 1.2062, then the .0002 rise of the USD value is two pips. So basically, the pip is the 4th decimal after the period.
While most currency pairs extend towards the 4th decimal point, there are some currency pairs that are an exception to the rule. Japanese Yen pairs go out only till the 2nd decimal point. Additionally, there are quite a few brokers that prefer to quote currency pairs beyond the standard 2 and 4 decimal points. These are called fractional pips, and they are usually referred to by traders as pipettes. These extend towards the 3rd or 5th decimal points. For example, if the GDP/USD pair moves up from 1.31012 to 1.31015, the .00003 rise in value can be identified as 3 pipettes.
The correct calculation of the position size is very important, especially if plan on following the strategy of rational money management. It is advised that you use this calculator every time you manually open a new position in the Forex market. It only takes a minute of your time, but it also helps you avoid unplanned cash losses and unnecessary risks. Counting the size of the position is also the first step towards organized Forex trading, which is an essential attribute of any professional trader. Truth be told, a pip calculator is one of the best free financial services you can find as a trader. So how does it work?
The Pip value calculator automatically calculates the exposure of your CFD and Forex trading account. Position size is calculated according to the number of lots you are working with.
1 forex lot is a term used in financing to define a contract in financial markets. This term defines the size of the transaction. For calculations related to Forex positions, here are a few examples of what lots represent in real-world currency:
The pip value is highly dependent on the size of your Forex position (number of lots). Keep in mind, that not all brokers are the same, hence, they do not offer the same trading conditions. Some brokers identify 1 lot as an equivalent of 10,000 units rather than 100,000. Therefore, make sure to clarify this nuance with your broker before running any calculations and beginning to trade.
So, how do you calculate how much a pip is worth?
Example: Trading 1 lot of EUR/USD with account currency in EUR.
It is quite simple on the surface, but the utility of this calculator and the benefits that it brings cannot be understated. While you certainly can make all the calculations by yourself, using a calculator will practically always be the better choice. Not only will you be saving precious time, since you will only need to fill out the required fields for the calculations, but the chance of a mistake is pretty much brought down to 0%, considering all calculations are done by the computer, which happens to be good at mathematics. When it comes to trading, there is no room for human error, at least for those that wish to bring down possible risks to a minimum.
