PIP Calculation Preschool Confusion

Hi I’m new here. going through the course at the preschool level. just had a little confusion regarding the topic “What is a pip”. The calculations got me in confusion. Here’s the part where I can’t seem to get it right: (Red font are my comments)

"As each currency has its own relative value, it’s necessary to calculate the value of a pip for that particular currency pair. In the following example, we will use a quote with 4 decimal places. For the purpose of better explaining the calculations, exchange rates will be expressed as a ratio (i.e., EUR/USD at 1.2500 will be written as “1 EUR/ 1.2500 USD”)
*Clearly understand this part. The value of 1 EUR is 1.2500 USD

Example exchange rate ratio: USD/CAD = 1.0200. To be read as 1 USD to 1.0200 CAD (or 1 USD/1.0200 CAD)
*1 USD is 1.0200 CAD right?

(The value change in counter currency) times the exchange rate ratio = pip value (in terms of the base currency)
[.0001 CAD] x [1 USD/1.0200 CAD]

Or Simply

[(.0001 CAD) / (1.0200 CAD)] x 1 USD = 0.00009804 USD per unit traded

*Now I just can’t seem to understand how it became 0.00009804 as the found pip value?

Using this example, if we traded 10,000 units of USD/CAD, then a one pip change to the exchange rate would be approximately a 0.98 USD change in the position value (10,000 units x 0.0000984 USD/unit). (We use “approximately” because as the exchange rate changes, so does the value of each pip move)"

*Where exactly did 0.98 come from? I did calculation of the formula but it doesn’t match the said value.

Anyone here who can help me get through here would be a great help. This part is so confusing to me.
Thank you so much

Hello, museifu

In this example, we are given that: USD/CAD = 1.0200

We know that this means that [B]1 USD = 1.0200 CAD[/B]

The question being asked and answered in the School lesson is this:

If the USD/CAD exchange rate changes by 1 pip, [B]how much is that 1 pip worth in USD?[/B]

Here is a slightly different way to calculate the answer:

We know that 1 pip is 1/10000 (one ten-thousandth) of a unit of the quote currency.[B]*[/B]

So, the exchange rate can be written as 1 USD = 10200 CAD PIPS

Therefore, 1 CAD PIP = 1 USD / 10200

that is, [B]1 CAD PIP = 0.00009804 USD[/B]

[B]And that’s the pip-value if we are talking about 1 unit of base currency (1 USD).[/B]

But normally, we are concerned with the pip-value per micro-lot (1,000 units), or mini-lot (10,000 units), or standard lot (100,000 units) of base currency.

Getting those pip-values merely requires a simple multiplication:

[B]Pip-value per micro-lot[/B] = 0.00009804 x 1000 = 0.09804 USD = [B]$0.09804[/B]

[B]Pip-value per mini-lot[/B] = 0.00009804 x 10000 = 0.9804 USD = [B]$0.9804[/B]

[B]Pip-value per standard lot[/B] = 0.00009804 x 100000 = 9.804 USD = [B]$9.804[/B]

  • [U]Edit[/U]:

That statement is true for all exchange rates EXCEPT yen exchange rates. In all yen-pairs (notice that the JPY is always the quote currency, never the base currency), [B]1 JPY PIP = 1/100 of 1 JPY.[/B]

Note that this does not alter the way that JPY pip-value calculations are performed.

For example, if USD/JPY = 114.02, then we could write: 1 USD = 114.02 JPY = 11402 JPY PIPS

The calculation would then be completed in the same steps as in the above example.

[U]Second Edit[/U]:

Be very careful if you are dealing with prices quoted in 5 decimals. The fifth decimal is NOT pips — it’s TENTHS of a pip. So, you must be sure to enter it into your calculations that way.

For example, if USD/CAD = 1.32579, then 1 USD = 1.32579 CAD = 13257[U].9[/U] CAD PIPS

.

1 Like

Hi Clint. Thank you very much for your time explaining. I think I somehow get it.
Getting this straight: In the example USD/CAD = 1.0200, it means it has 4 decimals right? Therefore, it is a mini lot of 10000 unit if I’m not mistaken.

Next is the value of 1 USD to CAD is 1.0200 in the USD/CAD pair. So for a single pip movement in the CAD, whether it goes up or down, the value of 1 pip in USD is 0.00009804 or 0.98 right?

Now, (i.e., 0.0000 decimal is 10,000 unit in the quote currency right? and because USD is much higher in value than the CAD, it goes to negative 0.0000(9804) or 0.9804 USD as the found pip value right? I hope this is clear to you. I just wonder where did the number 9804 come from? I think I’m getting near finding my way out of the rabbit hole.

I guess it’s pretty damn hard for beginners to calculate pips if the base currency is the USD as it is the currency used in the account. Unlike in the USD being the quote currency and the currency used in the account, it would just be easy to calculate right?

Anyway, your reply is so much appreciated Clint. Big help! and still looking forward. Just an inch to finally get through this and I hope you could still help me with this. Thank you so much

Edits
I’m using ordinary basic calculator with the formula: [(.0001 CAD) / (1.0200 CAD)] x 1 USD = pip value from the preschool section and I got the answer 0.0001 and not 0.00009804

And then I switched on using scientific calculator and used the same formula, but then I got this: 0.0000980392

Is it the same right answer? I think the scientific calculator is just being more specific.

Right. There are 4 digits after the decimal point.

No. It’s just a price. It has nothing to do with the position size you might choose to take.

The exchange rate between the USD and the CAD (in this example) is: 1 USD = 1.0200 CAD.

We could write this several different ways: $1 = C$1.0200.

Or, we could drop the extra zeros, and write $1 = C$1.02.

Imagine that the [I]Foreign Exchange Kiosk[/I] at the airport offered you this price.

You could buy C$1.02 (Canadian) and pay for it with $1 (U.S.)

Or you could buy C$1,020 (Canadian) and pay for it with $1,000 (U.S.).

[B]In each case, it’s the same price (USD/CAD = 1.0200).[/B]

Only the size of the transaction has changed.

The value of 1 pip is 0.00009804 CAD (C$0.00009804 — that is, slightly less than 1/100¢ Canadian),
[B]if you are talking about a $1 transaction.[/B]

The value of 1 pip is 0.9804 CAD (C$0.9804), [B]if you are talking about a $10,000 transaction.[/B]

Let’s say that you enter a USD/CAD long trade (in other words, you buy USD/CAD). And, let’s say that your position size is 10,000 units (in other words, you buy one mini-lot of USD/CAD). And finally, let’s say that the price of USD/CAD moves up, as you expected, earning you a profit.

Each pip that the price moves up earns you 0.00009804 CAD [B]per dollar of your position-size.[/B] And, because your position size is 10,000 units (that is, $10,000 U.S.), the profit on your entire position is 10000 x 0.00009804 CAD [B]per mini-lot,[/B] which is 0.9804 CAD — that is, C$0.98 (rounded off).

Wrong. See my second answer, above.

Refer to my previous post.

1 CAD PIP = 1 USD / 10200 = 0.0000[U]9804[/U] USD (based on the example price USD/CAD = 1.0200)

You are right.

If the quote currency in the pair you are trading matches your account currency, then pip-values are always:

10 units of account currency per standard lot (100,000 units of base currency)

1 unit of account currency per mini-lot (10,000 units)

1/10 unit of account currency per micro-lot (1,000 units)

1/100 unit of account currency per nano-lot (100 units)

1/10000 unit of account currency per UNIT of base currency

These statements are true for EVERY account currency (USD, EUR, GBP, JPY, etc.) which matches the quote currency of the position.

The results are simply being rounded off.

1 / 10200 = 0.00009803921569… if you want to go crazy with decimal places.

Your scientific calculator rounded that off to 0.0000980392

The School lesson (and I) rounded it further to 0.00009804

And your ordinary calculator rounded it to 4 decimal places: 0.0001

.