Okay, fasten your seat-belt, and let’s do a pip-value calculation the old-fashioned way – by hand.
Let’s begin with a solid understanding of what a pip is.
In individual currencies –
For all major and minor currencies EXCEPT the JPY, one pip is 1/10000 of one unit of currency.
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For the USD, one pip is 1/10000 of one unit of USD (that is, one pip = $0.0001)
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For the GBP, one pip is 1/10000 of one unit of GBP (that is, one pip = £0.0001)
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…and so forth
For the JPY, one pip is 1/100 of one unit of JPY (that is, one pip = ¥0.01)
In currency pairs –
The pip-value of a currency pair is stated in terms of the quote currency.
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For the EUR/USD pair, one pip is 1/10000 of one unit of USD
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For the USD/CHF pair, one pip is 1/10000 of one unit of CHF
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…and so forth
For the USD/JPY pair, one pip is 1/100 of one unit of JPY
In lots traded –
Generally, in forex trading, we don’t trade individual units of currency. We trade lots (100000 units), or fractions of lots – mini-lots (10000 units), micro-lots (1000 units), etc. So, we are concerned with the value of one pip multiplied by the size of our trades.
Typically, when traders speak of pip-values, they mean the value of one pip, in a particular currency pair, in a specified trade size.
For all major and minor pairs XXX/YYY, except yen-pairs, pips are worth –
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1/10 of a unit of YYY per micro-lot (1000 units)
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1 unit of YYY per mini-lot (10000 units)
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10 units of YYY per standard lot (100000 units)
For all yen-pairs XXX/JPY, pips are worth –
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10 units of JPY (that is, ¥10) per micro-lot
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100 units of JPY (that is, ¥100) per mini-lot
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1000 units of JPY (that is, ¥1000) per standard lot
Now that we have a clear understanding of pips, we can do some calculations.
Let’s say you have an account denominated in USD, you want to calculate the pip-value for a GBP/JPY trade, and your intended position size is 3 mini-lots. And let’s say that currently USD/JPY = 109.00. (Round numbers make the math simpler.)
Notice that we don’t need the current price of GBP/JPY (the traded pair), in order to do this calculation.
We have already determined (above) that pips are worth ¥100 per mini-lot. But, your account is denominated in USD, so you want to know the dollar-value of ¥100 per mini-lot in a 3-mini-lot trade.
Pip-value = (¥100 per mini-lot) ÷ (¥109.00 per dollar) x 3 mini-lots = $2.75 (rounded off).
You can check this result, using The Babypips Pip-Value Calculator, where you will get this result –
Notice that the Pip-Value Calculator asked for the price of GBP/JPY, which is unnecessary for this calculation. You can prove to yourself that this “Ask Price” is extraneous data, by changing it to any number you like (even a ridiculous number, like 5000), and then re-calculating. You will find that it doesn’t change the calculated pip-value.
For some other pip-value calculations, the current ask price for the pair traded is required, and that’s why it’s one of the elements in the Calculator.