Calculating Pips

Beginner Questions
1

Hi,

I’ve been learning about calculating Pips today in Preschool and I’m struggling to understand a part of the calculation.

In example 1 it states: [.0001 CAD] x [1 USD/1.0200 CAD]

My uncertainty comes from the .0001 infront of CAD. Where does this figure come from?

In the next line it simplifies it and calculates it as: [(.0001 CAD) / (1.0200 CAD)] x 1 USD = 0.00009804 USD per unit traded

My next question is, how do they move the equation around? Originally the 1 USD is being divided by 1.0200 CAD, then in the next line the .0001 CAD is being divided by the 1.0200 CAD?

I hope someone understands my question.

Thanks in advance.

2

Alright I understand why .0001 is used, because it’s necessary to calculate the value of a pip for that particular currency pair.I still don’t understand the simplified part where 1.0200 is moved across the equation.

3

It’s to calculate the actual cent value of the pip, so that when you take a mini lot, i.e. 10,000, you know the value you are trading per pip. This is done for you automatically with your broker, I only enter the value I want to trade per pip, saving me the calculations.

4

Yes @HAzEZA,

First it’s important to understand that the value of a pip is determined by the counter currency (AKA the quote currency) which is the second currency of a pair.

For example:

  • CAD is the counter currency of the USD/CAD currency pair.
  • USD is the counter currency of the AUD/USD currency pair.
  • JPY is the counter currency of the GBP/JPY currency pair.

Since the value of a pip is determined by the counter currency:

  • The value of a pip is 0.0001 CAD for the USD/CAD currency pair.
  • The value of a pip is 0.0001 USD for the AUD/USD currency pair.
  • The value of a pip is 0.01 JPY for the GBP/JPY currency pair. (JPY currency pairs are quoted to 2 places to the right of the decimal point instead of 4.)

Since the value of a pip for the USD/CAD currency pair is 0.0001 CAD, you must convert this into the USD equivalent, if your trading account is denominated in US dollars. You would make this conversion by dividing 0.0001 CAD by the USD/CAD exchange rate. That is what the calculations in your example are meant to do.

If the current USD/CAD exchange rate is 1.0200, then 0.0001 CAD equals 0.00009804 USD, which is 0.0001 divided by 1.0200.

1 Like
5

Thank you very much for an informative answer.I completely understand why it works like that now.

1 Like
7

Thank you for breaking it down. I too was trying to figure this out.:pray: