What is a Pip?

A pip is a unit of measurement of the currency exchange rate. If we bought EUR/USD at 1.35065 and then closed our position at 1.35722 means we made a profit of 65.7 pips. 65.7 x $10 = $657 dollars in profit.

EUR USD for pips

A pip is then the 4th decimal place on this exchange rate. 1.35722 – 1.35065 = 0.00657

When we will be looking to trade GBP/JPY for example the pip is the second decimal place. If you look at the right hand side of your MT4 platform you will see the rates being 172.750 for example. We can like above do a similar calculation to estimate the pip movement.

GBP JPY for pips

 

PIP (decimal) / Exchange rate *. Lot size = PIP value

PIP Calculation will always be given in the currency pair’s BASE currency.

Let’s assume we will be using a 100,000 unit (Standard) Lot Size. We will now recalculate some examples to see how it affects the Pip Value.

1.  USDJPY at an exchange rate of 119.80 (0.01/119.80) x 100,000 = $ 8.34 per pip

2.  USDCHF at an exchange rate of 1.4555 (0.0001 / 1.4555) x 100,000 = $6.87 per pip

How do I calculate Profit and Loss?

So now that you know how to calculate Pip Value and Leverage, let’s look at how you calculate your Profit or Loss.

Let’s buy US Dollars and sell Swiss Francs.

  1. The rate you are quoted is 1.4525 / 1.4530. Because you are buying US Dollars you will be working on the “Ask” price of 1.4530, or the rate which Traders are prepared to sell.
  2. So you buy 1 Standard Lot (100,000 unit) at 1.4530.
  3. A few hours later, the price moves to 1.4550 and you decide to close your trade.
  4. The new quote for USDCHF is 1.4550 / 1.4555. Since you’re closing your trade and you initially bought to enter the trade, you now sell in order to close the trade so you must take the “Bid” price of 1.4559. The price Traders are prepared to buy at.
  5. The difference between 1.4530 and 1.4550 is .0020 or 20 Pips.
  6. Using our formula from before, we now have (0.0001/1.4550) x 100,000 = $ 6.87 per pip x 20 pips = $137.40

Remember, when you enter or exit a trade, you are subject to the spread in the Bid / Ask quote. When you Sell a currency, you will use the Bid price and when you Buy, you will use the Ask price.

Example for calculation PIP values, profit and losses:

 

Example 1
USDJPY quoted for 91.04

Traded Lot size is 0.1

Account Base Currency is USD

In this example our Pip Decimal is 0.01 divided by 91.04

0.01 / 91.04 = 0.000109841828

To find the pip value, we multiply the last answer with the size of the position. ( This example assumes 10,000)
0.000109841828 x 10,000 = 1.09841828

Thus, each Pip is worth $1.09.

If we Buy (go Long) USDJPY for 10,000 units (0.1 Lot) and rises 100 Pips, then we earn a Profit of $109.

 

Example 2
USDCAD quoted for 1.1050

Traded Lot Size is 0.1

Account Base Currency is USD

In this example our Pip decimal is 0.0001 divided by 1.1050
0.0001/1.0150=0.985221675

Thus, each Pip is worth $0.98.

If we Buy (go Long) USDCAD for 10,000 Units (0.1 Lot) and it Rises by 50 Pips, we would earn $49.

In the above 2 examples our currency was USD, therefore our Pip calculation was correct at once, and no currency conversion was necessary.

 

Example 3
EURUSD quoted for 1.4550

Traded Lot Size is 0.1

Account base currency is USD

In this example our pip decimal is 0.9091 divided by 1.4555
0.0001/1.4450 = 0.0000692041522

To find the Pip value, we multiply the last answer with the size of the position ( This time, we’ll assume a purchases of $10,000 units)

= 0.0000692041522 x 10 000 = 0.692

To convert accurately into US dollars ( our pip calculation left us with an amount in Euros), we add an additional calculation. We need to multiply the Euro times the exchange rate.

Euro x Exchange rate of EUR/USD
0.692 x 1.4550 = 1.006868 USD

Thus, each pip worth 1 USD

In the above example our base currency was in USD; however the traded currency pair BASE currency was not. Therefore we had to add an extra calculation (currency conversion) in order to get the Pip value in our Account’s Base Currency.

 

Example 4
Calculation of Profit and loss for EURUSD Trade of 1 lot (Account base currency is USD)

Buy trade executed at 1.5555 and sell trade executed at 1.5560.

Profit/loss = 1.5560 – 1.5555 = 0.0005 OR 5 Pips.

Pip value    = 0.0001 / 1.5560 *  100 000 = 6.42 EUR

PIP value in USD  = 6.42 *  1.5555 = 10 USD

Profit / loss = 5 pips x 10 = 50 USD.

 

Example 5
Calculation of Profit and Loss. For USD/CHF Trade of 1 lot (Account Base Currency is in USD)

Buy trade executed at 1.0473 and sell trade executed at 1.0488.

Profit / loss = 1.0473 – 1.0488 = 0.0015 OR 15 Pips.

PIP value = 0.0001 / 1.0488 *  100 000 =  9.53 US

Profit/ loss =  9.53* 15 = 142.95 USD

 

Example 6
Calculation of Profit and loss for USDJPY Trade of 1 lot (Account Base Currency is in USD)

Buy trade executed at 108.09 and sell trade executed at 108.30.

Profit / Loss = 108.30 – 108.09 = 0.21 OR 21 Pips.

PIP Value = 0.01/108.30 * 100 000 = 9.23 USD

Profit / Loss = 9.23 *  21 = 193.83 USD.