Calculating Pip Values

Beginner Questions
1

Okay so maybe I’m just really terrible at math, but I’m a bit confused at the moment. I was in the section on the School of Pipsology where they were discussing how to calculate pip value. The example formula stated was:
(The value change in counter currency) times the exchange rate ratio = pip value (in terms of the base currency

So using the example of 1 pip move in value of the quote currency at an exchange rate of GBP/USD - 1.2654
that would make the exchange rate ratio 1 GBP/1.2654 USD

If there was a 1 pip move that would be a .0001 in change to the counter currency in this case USD (Correct me if I’m wrong so far.)

Using the formula that would make the equation .0001USD(1GBP/1.2654USD)

Now this is where my confusion is…

It’s been awhile since I was in algebra but if I remember correctly you would divide on both sides making t .0001/1.2654 = which is 7.90 x 1 = 7.90 meaning it’d be 7.90 in GBP per pip and then you’d have to calculate that back into your account currency to see what it would be in dollars (for my case) when you close the tried by executing an opposite order to your original.

Somehow my math is off because I have a feeling the correct answer is .790 in GBP

What am I doing wrong?

2

Don’t dwell on it.
There’s a pip calculator here in the Tools section

3

I disagree, Carlos.

If this new member wants to know the math behind this, or any other aspect of the currency market, I think his curiosity should be satisfied.

Here’s the derivation of pip-values:

[B][U]Step 1[/U][/B]

If GBP/USD = 1.2654, and you want to do math with this price, rewrite this equation as follows:

1 GBP = 1.2654 USD

If the GBP/USD price increases by 1 pip,

then 1 GBP = 1.2655 USD

Dividing both sides of the equation by 1.2655, we get

1 GBP / 1.2655 = 1.2655 USD / 1.2655

0.7902 GBP = 1 USD

or, reversing this result, [B]1 USD = 0.7902 GBP[/B]

[B][U]Step 2[/U][/B]

[I]What we have calculated is the inverse of the GBP/USD price.

That is, we have calculated the “price” of USD/GBP.[/I]

So, how is this related to the GBP/USD pip-value?

1 USD is [I]by definition[/I] 10,000 USD PIPS (also, 1 GBP = 10,000 GBP PIPS, 1 CAD = 10,000 CAD PIPS, etc.)

So, if 1 USD = 0.7902 GBP (the result obtained in Step 1)

then 10,000 USD PIPS = 0.7902 GBP

and 1 USD PIP = 0.00007902 GBP, [I]which is the pip-value for a position size of 1 unit of GBP/USD[/I]

If you want to know the pip-value for a position size of 1 micro-lot, multiply 0.00007902 by 1,000

For a position size of 1 mini-lot, multiply by 10,000 — and [I]voila![/I] you’re right back to the number calculated in Step 1 — 0.7902.

[B]In other words, the calculation of the inverse price very conveniently gave us the pip-value, in terms of GBP, for a one-mini-lot (10,000 unit) position.[/B]

So, we could have skipped Step 2 altogether, and simply adjusted the Step 1 result to get

the pip-value for one micro-lot (1,000 units) = 0.07902 GBP

or the pip-value for one standard lot (100,000 units) = 7.902 GBP.

I hope that helps to clear things up.

By the way, you should use the Pip-Value Calculator that Carlos referred to, to check these results.

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6

Clint,

Thank you for clearing that up for me. Let me just make sure I’ve got this correct using a different example.

USD/CHF - 1.5556

1 USD = 1.5556 CHF

Goes up 1 pip then CHF =1.5557

1 USD/ 1.5557 = 1.5557 CHF/1.5557 CHF =.642 CHF per

6.42 per 100,000
.642 per 10,000
.0642 per 1,000 unit
.00642 per 100 unit

If this is correct I think I have a solid grasp on understanding the initial calculation for pip value.

So say your trading a 1,000 position size that would make the equivalent pip value .0642

And does that mean that you would have to close a 100 pip trade to make 6.42 CHF?

8

You can forget about the 1-pip price increase. How the USD/CHF got to be 1.5557 doesn’t matter.

The question to be answered is this —

Given USD/CHF = 1.5557, what is the value of 1-pip?

You have reversed things here.

1 USD = 1.5557 CHF

Therefore, 1 CHF = 1 USD / 1.5557 = [B]0.643 USD[/B] (NOT CHF, as you stated above)

If your account is denominated in CHF, you obviously would want to know pip-values in CHF. In the case of a USD/CHF trade in a CHF-denominated account, 1 pip would be worth —

0.10 CHF per micro-lot

1 CHF per mini-lot, and

10 CHF per standard lot

This is the pattern, [B]always, when the quote-currency is the same as the account currency.[/B]

Example: if you are trading XXX/YYY in an account denominated in YYY, then 1 pip =

0.10 YYY per micro-lot

1 YYY per mini-lot, and

10 YYY per standard lot

As noted above, the result you calculated should be in USD, not CHF.

Given that correction, if you are trading a 1,000-unit position in USD/CHF, and the pip-value is $0.0642 per pip, per micro-lot, then —

Yes, you would need a profit of 100 pips in this position to earn $6.42 (USD, not CHF).

.

9

Okay, sorry about the mix up. The math was correct I just need to make sure the currency is correct. I just have one last question.

Say we’re trying to convert GBP into USD

The original pair traded is GBP/JPY

We enter in the trade at 1.2479 and want to calculate how much in USD we’d make per pip.

1 GBP = 1.2480 JPY

1GBP/1.2480 JPY =1.2480 JPY/1.2480 JPY

Then GBP = .801

How do we calculate that in dollars?

10

I think you mean you enter a trade at GBP/JPY = 124.79

However, note that the current price of GBP/JPY is more like 141.14

Now you’re getting deep into the weeds.

You will be amazed to hear that the price of GBP/JPY doesn’t matter at all, in this calculation.

What matters is the current price of USD/JPY, even though you’re not trading USD/JPY.

I will tell the answer to your question, without explaining the derivation.

The current price of USD/JPY is 112.62

The pip-value in USD for any yen-pair is — $100 / the current price of USD/JPY

$100 / 112.62 = $0.888 per mini-lot (10,000 units)

= $0.0888 per micro-lot (1,000 units)

= $8.88 per standard lot (100,000 units)

Several years ago, I posted this table, which you might find useful for pip-values in USD.

For accounts denominated in U.S. dollars, here is a table of
pip-value formulas for the most commonly traded pairs:

638×751

If you work at it, you might be able to convert this table to pip-values in EUR, or GBP, or any other account currency.

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