Forex Recipe

If you are into forex, you must have heard of pips and lots. To understand what is pip, we should start with the expansion of pip, which is percentage in point. It is important to know as much as possible about pip as with pip values you calculate your profit and loss.

Pip is the most common increment of currencies. If, for example, the EUR/USD moves from 1.2250 to 1.2251 it is said to be moved by 1 pip. So, it is the last decimal place of a currency quotation.

As every currency is unique pip is to be calculated on the basis of the value of that particular currency. For example, for currency pairs with US Dollar quoted first, the process to calculate pip would be the following

USD/JPY rate at 119.80 the pip will be 0.01. For this particular currency pair the value goes up to two decimal places but for most of the other currencies, they go up to four decimal places. So it would be 0.01 divided by 119.80, which comes about 0.0000834. For USD/CHF if the rate is 1. 2489, to get the pip, 0.0001 to be divided by the exchange rate, which will be 0.0000800704.

For currency pairs where USD is the quote currency, the calculation is even simpler. The pip value here is always one pip, for example, 0.0001.

Now it is time to understand what is a lot. The Spot Forex is traded in lots. The standard lot size is $100,000. But, you can also find a mini lot size, which is $10,000. Now you can realize how to take advantage of the tiny increments in pips.

Say, you have a lot size of $100,000 lot size. Taking the earlier example of USD/JPY at an exchange rate of 119.90, it shows (0.01 / 119.80) ´ $100,000 = $8.34 per pip. The same way, for USD/CHF, at an exchange rate of 1.4555, it is (0.0001 / 1.4555) ´ $100,000 = $6.87 per pip. These are the cases where USD is the base currency.

In cases where USD is quote currency, the formula is slightly different. Here, if EUR/USD is at an exchange rate of 1.1930, the rate will be (0.0001 / 1.1930) ´ EUR 100,000 = EUR 8.38, and if you wish to convert this to USD, EUR 8.38 ´ 1.1930 = $9.99734 or nearly $10 per pip.

Now, it is simple to calculate your profit and loss depending on the movement of the pips.

This entry was posted on Saturday, July 12th, 2008 at 9:30 am and is filed under Forex Tips, Forex for Beginners. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.