What is a Forex Pip and Pip Value?

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What is a Forex Pip and Pip Value?

According to Investopedia, a pip(short for point in percentage) is a very small measure of change in a currency pair in the forex market. It is a standardized unit and is the smallest amount by which a currency quote can change. A pip is usually $0.0001 for U.S.-dollar related currency pairs.

In this article, Base currency refers to the first currency in a pair ie EUR in EURUSD and quote currency refers to the second ie USD.

TO CALULATE:

1) If account is denominated in USD and USD is the quote currency (EURUSD):
Pip Value = 0.0001 x Units

Example: You have a 5000 USD account and go long 25 000 EURUSD (.25 lots):

Pip Value = 0.0001 x Units
Pip Value = 0.0001 x 25 000
Pip Value = $2.50

2. If account is denominated in another currency (ie AUD) and USD is the quote currency (EURUSD)
Pip Value = 0.0001 x Units / AUDUSD

Example – You have a $5000 AUD account and you go long $25 000 EURUSD:

Pip Value = 0.0001 x Units / AUDUSD
Pip Value = 0.0001 x 25 000 / .7150
Pip Value = $2.50 / .7150
= $3.50

Note at current market rates, pip value is substantially larger if account is denominated in AUD – this is very important to know when calculating stop losses.

2) If account is denominated in USD and USD is the base currency (USDCHF):
Pip value = 0.0001 x units/quote

Example – You have a $5000 USD account and go long $25 000 USDCHF:
Pip value = 0.0001 x units / quote
Pip Value = 0.0001 x 25 000 / USDCHF
Pip Value = $2.50 / .9915
Pip Value = $2.52

3.) If account is denominated in another currency (ie AUD) and USD is the base currency (USDCHF):
Pip Value = 0.0001 x units / quote / AUDUSD

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Example – You have a $5000 AUD account and go long $25 000 USDCHF:
Pip value = 0.0001 x units / quote / AUDUSD
Pip Value = 0.0001 x 25 000 / USDCHF / AUDUSD
Pip Value = $2.50 / .9915 / AUDUSD
Pip Value = $2.52 / .7150
Pip Value = $3.52

3) If account is denominated in USD and you are trading a cross with no USD component such as EURGBP:
Pip Value = 0.0001 x Units x Quote currency rate (GBPUSD).

Example: You have a 5000 USD account and go long 25 000 EURGBP (.25 lots):

Pip Value = 0.0001 x Units x GBPUSD
Pip Value = 0.0001 x 25 000 x GBPUSD
Pip Value = $2.50 x 1.4350
Pip Value = $3.59

If we used the above example but with an AUD account, we could either divide the final USD pip value by the AUDUSD rate, or use GBPAUD instead of GBPUSD as the quote currency rate.

Article Source: Vantage FX

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