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The Role of a Pip Calculator in Forex Trading
Pip is one of the first technical terms that we come across while getting into forex trading. Pip calculation can be a bit confusing for an average beginner. But you don’t need to worry about that, since some platforms do provide a pip calculator to do the job for you. And you will be able to understand the role of a pip calculator in forex trading by the end of this reading session. So, let’s get started.
What is a Pip?
Pips are used for measuring the changes in the value of a currency pair’s exchange rate. It stands for ‘Percentage In Point’ or “Price Interest Point’. It can denote even the smallest change that happens in the exchange rate. For most currency pairs, pip is calculated with the difference that occurs in the fourth decimal place (0.0001). But in the case of Japanese Yen pairs we have to look at the second decimal place (0.01) for pip calculation.
Pip as a Measure of Profits/losses in Forex
Many traders talk about their trading profits/ losses by referring to the number of pips. We often hear traders making statements like “I made 10 pips on today’s trade”. This means that the trader made a profit of 10 pips while exiting a trade. But the amount of profit will vary depending on the currency that they trade with. Calculating pips value can also help in managing the risk per trade and this can be used for minimising potential losses that can happen in a trade. However, calculating the number of pips can become difficult with the increased number of trades, so at that time, you can make use of a profit calculator to determine the exact profit you have made in the base currency.
How to Use a Pip Calculator – Beginner’s Guide
Using a pip calculator is quite easy if you know some basic concepts of trading. Here’s a beginner’s guide to guide you in case you need some more info to properly use a Pip calculator.
- First Step : Enter the Currency Pair You Are Trading With
In the context of forex trading, your trading instrument is an international currency pair. A currency pair is made up of two currencies. Let’s take the example of a popular currency pair EUR/USD to understand this better. The first currency in this pair is referred to as the base currency A trader who chooses EUR/USD as a trading instrument will be buying or selling the base currency, Euro in a trade. The base currency’s value will be quoted against the second currency stated in a pair which is USD in this case. A currency pair can also be considered the exchange rate between the two currencies. So, you will have to decide upon the currency pair first before anything else in order to use the pip calculator.
- Second Step : Choose Your Currency
Now, this is the currency that you have chosen to operate your trading account with. That is the currency in which you will be funding your account. Your trading capital will be deposited in this currency and your withdrawals will also be processed in the chosen currency. All of the accounting for your profits/losses can be done with this chosen currency. Normally a trader will be asked to choose their preferred currency at the time of opening an account with a forex broker. You will have to state the currency in the pip calculator as well.
- Third Step : State the Type of Lot and Number of Lots
Next step is stating the type of lot and number of lots. This information will be used by the pip calculator in determining your position size in a trade. There are 3 types of lots that you can choose from.
- Standard Lot = 100,000 Units of a Currency
- Mini Lot = 10,000 Units of a Currency
- Micro Lot = 1000 Units of a Currency
As you can see, micro lot is the smallest you can go for and standard lot is the biggest one you can trade with. You have to choose the one that’s best for you and then enter the number of lots.
- Fourth Step : Enter the Number of Pips
The fourth and last step is entering the number of pips. You can state 1 if you want to calculate the value of just 1 pip in the currency you wish to trade in. If you wish to calculate the value of 2 pips, then you will have to enter 2 in the pip calculator.
- The Final Result
Once you enter all the above-mentioned values and data, the pip calculator will return you the answer as soon as you click on the calculate button. The result you get will be the value of a pip in your account base currency based on the current conversion rate. The conversion rate will keep changing and hence you will need to use the pip calculator every time you want to know the value of a pip.
Let’s understand how the manual calculation is done with the help of an example.
Example of Pip Value
Suppose EUR/USD is currently trading at a market price of 1.0000, and you have chosen a micro lot of 1000. The value of a pip will be calculated as follows.
(0.0001/1.0000) x 1000 = 0.1
This means that for each pip movement, your trade would earn or lose 0.01 Euros.
The pip value will be defined by the quoted currency, which is USD in this case.
The calculation will be done as follows.
1000 x 0.0001 = 0.1
So your trade can result in $1 of profit or loss whenever there is a pip movement taking place. Another way to do this would be to multiply your quoted currency pip value by the current exchange rate of EUR/USD.
Save Your Time by Using a Pip Calculator
The calculation which we did with the example may look easier because that was just a micro lot. But the calculation can get much more complex in real-time trading when the lot sizes are bigger. Therefore, using a pip calculator will be the best method for saving your time and energy.