What is Pip and How to Calculate It?
original article Apa itu Pip dan Bagaimana Cara Menghitungnya?
In Forex trading activities, there are a number of special terms that are often used, one of which is “pip”.
You must understand it to start trading. This is non-negotiable, because this knowledge will make your life easier.
In this Blog article, Finex will explain to you what a pip is and how to calculate it.
Definition of Pip
Pip stands for “percentage in point” or “price interest point”. A pip is a unit that shows the change in value between two currencies.
Sample case. You want to buy Euros and at the same time sell US dollars. At the same time, there are other traders who want to sell Euros and buy US dollars. Traders often use the term “pip” to indicate the spread between the bid and ask prices of a currency pair, as well as how much profit or loss the transaction made.
If EUR/USD moves from 1.11000 to 1.11001, the increase in value is one pip. A pip is usually the last decimal in the price.
How to Count Pip
Then how to calculate the profit (or loss) that we get for each price movement?
Relatively speaking, the answer depends on the number of positions we have open. A bigger position means that every pip move in a currency pair will create a bigger move in our balance. Therefore you need to know the types of trading sizes available. As a trader you can trade using lots.
In general, there are three types of trading sizes, namely:
1 lot = 100,000 units
1 lot = 10,000 units
1 lot = 1000 units
It should be borne in mind that the pip value is also determined by the currency pairs with the highest liquidity and volume in the market, also known as major pairs. USD is always the reference currency (base/quote currency) in major pairs.
Pip Formula for Direct Pair
This is a major pair type with USD as the quote currency (EUR/USD, GBP/USD, AUD/USD).
The formula is as follows to calculate pips:
Lot size x Pip position size in a row of numbers behind the decimal
100,000 (standard lot size) x 0.0001 = 10 pips
So if you trade one standard lot, every 1 pip on for example EUR/USD is $10.
How to calculate profit or loss for a transaction with direct pair?
By knowing the difference in exchange rates when opening and closing positions.
For example, a sell position was opened at 1.05250, then closed at 1.05100. Then the price difference between the position and the standard trading lot is 15 pips.
As the price goes down, this sell position makes a profit.
15 pips x $10 = $150 profit.
The Pip Formula for Indirect Pair
This is a type of pair with USD as the base currency (USD/CAD, USD/JPY, USD/CHF).
To calculate the pip, the formula is:
(Lot size x Pip position size in a row of numbers behind the decimal)/Current exchange rate
For example, the current USD/JPY exchange rate is 114,600, so the value of 1 pip is…
(100,000 x 0.01)/114.6 = 8.72 pips
So every 1 pip on USD/JPY for one standard lot is worth $8.72.
How to calculate profit or loss for a transaction with indirect pair?
To calculate a fixed profit or loss by looking at the difference between the opening and closing prices. So when buying at 114,600 and closing at 113,600 with standard lots, rising prices mean profit.
The calculation, 100 pips x 8.72 = profit $872.
Always be willing to understand the concepts that support the path to success. That’s why Finex is here to help you. Now you know how to calculate pips. Are you ready to make a profit?