What's a "Pip" Worth?

Joined : 30 Mar 2008 Posts : 41 Location : New York

If you're trading in the spot Forex-market, you rarely talk about gains in terms of percentages. While your stock may go up 10% or 15%, your currency trades may go up one or two "pips."

What you need to understand is technically, a "pip" is a percentage. In fact, the word itself "pip" means "percentage in points." It's the smallest increment of movement that a currency pair can move. So if your EUR/USD trade goes from 1.552 to 1.553, then your trade just went up one pip. If your pair went from 1.552 to 1.551, then your trade went down one pip.

But what's a pip worth anyway?

Honestly, it depends on what kind of trading account you have. If you're trading currencies as an individual, you're probably working with what's called a "mini-account." A mini-account trades 10 times less than a standard account, so it's better for retail investors.

And in a mini-account, a single pip is worth a US$1.00 (if you're trading a pair that has USD as the second currency listed in the pair). So in our example, if the EUR/USD went up one pip, you made US$1.00.

But if you're using what's called a "standard account," then you're trading 10 times more with each trade. Then each pip would be worth US$10.00, if you're trading pair ends in "USD."

If a pair does not end in USD, then the pip will technically be worth less than US$1.00 in a mini-account. When you're not trading in dollar terms, you can calculate the pip value with this formula:

Pip value = lot size x tick size/current rate.

For example: Let's assume USD/CHF is quoted at 1.1200.

You're trading 10,000 units in a mini-lot multiplied by .0001 (the smallest quoted increment for this pair). Then you would divide by the current quote for USD/CHF - that's 1.1200, as I said above.

So...
Pip value = (10,000 x .0001)/1.1200
Pip value = 89 cents

What you need to know: A pip tracks how much your currency trade is going up or down. It's tracking your percentage movement.

If you're using a mini-account, your pips are worth $1.00 a piece if you're trading a USD pair. If you're not trading in USD terms, then use the formula above to figure out how much each pip is worth.

Once you know what pips are valued, it's all downhill from there.

Joined : 30 Mar 2008 Posts : 41 Location : New York

but its recommended you trade in minilots if you are having an account of less than $50,000, for risk mgt purposes