WHAT ARE PIPS AND HOW TO CALCULATE THEM CORRECTLY?

A pip is one of the basic notions on Forex. However, there are traders who do not completely understand what is a pip and cannot correctly calculate it. Let’s look at it in detail.

 

A pip, or, sometimes, a point, is a very small measure of change in a currency exchange rate on the forex market. Normally, on Forex, 1 pip equals 0.0001. However, there are also fractional pips. In this case a financial instrument includes the yen, one pip corresponds to 0.01 as the yen’s price is lower than other major currencies’ prices.

 

What is a Pip? | Learn Then Trade | TradeForexSA

 

Let’s look at the example. In the morning, the EUR/USD pair traded at 1.3005 and in the evening the currency pair increased to 1.3085. It shows that the euro bloc currency rose by 80 pips.  Or, for instance, the USD/JPY pair was at the level of 87.75 and then declined to the score of 87.00. Consequently, the price changed by 75 pips.

 

On Forex a pip and a point have the same notion, but on the stock market their meanings are completely different. Thus, on the NYSE, 1 pip equals 1 cent and it is the smallest measure of change in a currency rate. At the same time, 1 point corresponds to 1 US dollar and equals 100 pips.

 

Now we understand the notions and difference between them. But it is not enough. It is also important to know how to convert the measure into the chosen currency. Let’s look at the US national currency. Special calculations will allow us to define the accurate amount of loss or profit. You can use the Forex calculator or make calculations yourself. At the same time, it is necessary to remember a simple formula. Using it, you can easily estimate your profits or losses when working on the currency market.

 

Calculation №1. This type of calculation is used for direct quotes which have the US dollar as a basic currency.  In this case, a pip equals the product of a lot size and the smallest change in price divided by the current price.

 

For example: the trade size of the USD/JPY financial instrument is 1 lot, the current price is 87.15 and the smallest change in the price is 0.01. As a result, a pip price is the following:

 

  • 1 pip= 100.00 * 0.01 /87.15 = 11.47 US dollars.

 

Calculation №2.  Let’s consider a financial instrument with indirect quotation. The US dollar is a quoted currency. Thus, a pip corresponds to the product of a lot size and the smallest change in price.

 

For example: the trade size of the EUR/USD financial instrument is 1 lot and the smallest change in price is 0.0001.

 

1 pip for a particular currency will cost 100,000 * 0.0001 = 10 US dollars.

 

Calculation №3. This method is used for cross rates. These pairs do not include the US dollar. In this case, a pip equals the product of a lot size, the smallest change in price, and the main currency instrument price divided by the current currency pair price.

 

Let’s look at the EUR/JPY pair with a lot size of 100,000. The smallest change in price is 0.01 and the current pair’s price is 112.46. The main currency instrument is EUR/USD with the price of 1.300. Thus,1 pip equals 100,000 *0.01*1.3000*112.50 = 11.56 US dollars.


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Posted By ginamiller : 21 September, 2020
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X Broker's spreads fluctuate from a minimum of 1.00 pips to a maximum of 3.00 pips at normal times. And in news time it can go from 3.00 to 7.00 pips or more. But if you average the whole day, the calculation will be around 2.00 pips. This broker has no cuts other than just spreads.   Now suppose Y broker is an ECN broker and this broker is offering Spread starts from 0 pips. But you must see that you will never get these 0 pips. ‍Start from 0 pips means spread is not 0, but the minimum can be 0. You can chat with them live to find out better, that their EURUSD pair has an average spread of 1.00 pips. You talk happily. Because where is X Broker 2.00 pips and where is 1.00 pips. Absolutely less than half the spread! You practically set up an account with a spread count indicator and checked that the average spread was actually 1.00 pips. Exactly as the spread is, no mess. But what you don't know is that ECN brokers cut one more thing than spreads and that commission that market maker brokers don't cut. Market maker brokers are only happy with spreads. And ECN / STP broker also deducts extra commission by showing a low spread. As a result, in many cases, the spread and commission combined become almost equal to the spread of the market maker broker. Suppose we check the commission of Y (ECN) brokers, they deduct $ 10.00 commission for every 1.00 lot in EURUSD pair. If you convert this $ 10 commission to pips, it will be 1.00 pips. Now adding the original spread and this commission pips gives 1.00 pips spread + 1.00 pips commission = total 2.00 pips deduction, which is equal to that market maker X broker.This is Shubhankar's trick. This is how so-called ECN / STP brokers fool new traders, lesser-known traders. If you find that the ECN / STP broker's spread and commission are much lower than that of the market maker broker, then you can decide that the broker's spread is actually lower. However, there are more brothers and sisters who are deeper. You may already be aware of and aware of ECN / STP broker commission deductions. So after checking the commission of ECN / STP broker, he decided to trade an ECN broker. This time the issue is about this commission. You asked in the live chat of the broker how much commission is deducted per par (1.00 lot) on EURUSD? The broker replied that পার 5.00 commission (i.e. 0.50 pips) is deducted per lot. You calculated that the spread and commission combined were 1.00 pips + 0.50 pips = 1.50 pips, which is less than the market maker breaker broker's 2.00 pips. Yet there is something less. That's good. But no. You actually need to ask - how many commissions does a round turn cost per EURUSD per lot (1.00 lot)? 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