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 Stocks & Commodities V. 33:04 (2021): Calculating Pip Values by Karl Montevirgen
Its All Transparent
Calculating Pip Values
Does it make a difference if your domestic currency is the
first currency or second currency? It sure does, and it affects
how the currency is valued. Here are some different scenarios
you can encounter and how you can calculate the pip values
in each of these situations.
by Karl Montevirgen
P
rior to opening any live positions in the FX markets, it is
advisable for traders to fully understand how to calculate
pip values so they know their positional risks and can
determine appropriate position sizes. Because currencies
are traded in pairs, for example, the EUR/USD, the pip-value
calculations will differ according to a currencys placement
within the pair structure. In other words, pip value calculation
will differ according to whether your domestic currency is
the base currency (first currency) or quote currency (second
currency). I will go over this in more detail later. If you are
trading a pair in which your domestic currency is neither the
base nor quote currency, then you will have to calculate the
value of one of the currencies (base or quote) and convert that
to your domestic currency in order to find the pip value. You
Copyright Technical Analysis Inc. www.Traders.com
will also notice that pip values in cross currencies will change
more frequently as the pairs exchange rate fluctuates.
Ill go over some basic terminologies and calculation ex-
amples here.
Pip: A pipthat is, percentage in pointis the smallest
increment that a currency pair can move. Most of the major
currency pairs are quoted with four decimal points (for example,
EUR/USD 1.3000). However, some currency pairs, such as
USD/JPY (US dollar against the Japanese yen) are quoted with
two decimal points, as in USD/JPY 87.00. Although many
dealers offer fractional pips, I will focus on the standard pip
sizes for this article. Note that the value of a pip depends on
the lot size that you are trading.
Lot:
Micro lot = 1,000 currency units
JANNOON028/Shutter Stock
Mini lot = 10,000 currency units
Standard lot = 100,000 currency units
Note that I use the term currency units rather than units of
a given currency (such as USD).
 Stocks & Commodities V. 33:04 (2021): Calculating Pip Values by Karl Montevirgen
FOREX FOCUS
Because currencies are traded in
pairs, the pip value calculations
will differ according to a currencys
placement within the pair structure.
Base currency/quote currency: The base currency is the first
currency in a pair; the quote currency is the second currency
in a pair.
Example 1: EUR/USDThe EUR is the base currency and
the USD is the quote currency. It can be read like this: If
the EUR/USD rate is 1.3000, then one euro is equivalent to
1.3000 US dollars.
Example 2: USD/JPYThe USD is the base currency and
the JPY is the quote currency. For USD/JPY at 87.00, one US
dollar is equivalent to 87 yen.
Calculations
Domestic currency in quote position:
If the domestic currency is in the quote position, you can
calculate pip values as follows: ((pip/price) x currency unit)
x price = pip value in domestic currency.
Note that the following example uses USD as the domestic
currency with an exchange rate of EUR/USD = 1.3000:
Step 1: 0.0001/1.3000 = 0.0000769
Step 2: 0.0000769 x 10,000 (the currency unit or lot
size) = 0.769 or 0.77 euro
Step 3: Now we convert the euro to USD: 0.769 x
1.3000 (exchange rate or price) = $0.9997.
Round up $0.9997 to $1.00.
Result: One pip = $1.00
Domestic currency in base position:
For currency pairs in which the domestic currency is the base
currency, simply follow steps 1 and 2. If the domestic currency
is USD and the USD/CHF is trading at 0.9179, then (pip/price)
x currency unit = pip value in USD.
Step 1: 0.0001/0.9179 = 0.0001089
Step 2: 0.0001089 x 10,000 (currency unit or lot
size) = $1.089. Round up to $1.09.
Result: One pip = $1.09
If USD/JPY is at 87.00 (note that the one pip in USD/JPY is
quoted with two decimals), then:
Step 1: 0.01/87.00 = 0.0001149
Step 2: 0.0001149 x 10,000 = $1.149
Step 3: Round up $1.149 to $1.15.
Result: One pip = $1.15
Copyright Technical Analysis Inc. www.Traders.com
Domestic currency is neither the base nor quote currency:
Here is where it gets a bit tricky. In this type of scenario, the
pip value calculation will require a few more steps and the
pip values will fluctuate more frequently depending on the
exchange rate. If you are trading a cross currency in which
the domestic currency is neither the base nor quote, then you
will need to determine the value of either base or quote and
then calculate that price against your domestic currency.
For example, suppose your domestic currency is USD and
you are trading a mini lot of GBP/JPY at 134.44. In order to
find the pip value in USD, you first need to determine the pip
value in GBP by following the steps I provided earlier.
Step 1: 0.01/134.44 = 0.0000743
Step 2: 0.0000743 x 10,000 currency units
= 0.74 GBP
Step 3: Next, you will have to determine the value
of 0.74 GBP in US dollars. In this case, GBP/
USD: 1.6147. So if one GBP = 1.6147 in USD,
then 0.74 x 1.6147 = 1.1948.
Result: One pip in GBP/JPY at the current change
rate = $1.19.
A month later, the GBP/JPY is trading at 143.83 while the
GBP/USD is trading at 1.6077. You make the same calculation
to determine the pip value.
Step 1: 0.01/143.83 = 0.0000695
Step 2: 0.0000695 x 10,000 currency units = 0.695 GBP
Step 3: Convert GBP to USD: 0.695 GBP x the current
exchange rate of 1.6077 and you get 1.117
(round up to 1.12)
Result: The GBP/JPY pip value in USD is now $1.12.
Know your pips
You now have a few methods to calculate pip values. One is to
have the domestic currency in the base position, another is to
have the domestic currency in the quote position, and the third
is to cross currencies in relation to your domestic currency. To
reiterate, it is important to know the pip value of your position(s)
in order to get a clear measure of your risk. Hopefully, when
determining your stop-loss and/or profit target distances, these
calculations will make the currency equivalence of your risk/
reward targets and distances transparent.
Karl Montevirgen is the head of forex operations at Global
Futures Exchange And Trading Company. He can be reached
at KMontevirgen@globalfutures.com.
Further reading
Montevirgen, Karl [2014]. Position Sizing In The Spot Forex
Markets, Technical Analysis of Stocks & Commodities,
Volume 32: April.
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