Hi, Lyndsey
You can do this sort of calculation by hand, or you can use the Pip Value Calculator.
For beginners, I suggest first learning how to do it by hand, so that you will gain an intimate understanding of pips. Then, for the rest of your forex career, you can do the quick and easy thing – which is to use the Calculator.
Veteran traders don’t calculate pip values or position sizes by hand. Instead, in each case they use a mental rule-of-thumb to get an approximation, or they use the appropriate calculator to get an exact value.
Let’s work through a pip-value calculation by hand.
Suppose your account is denominated in euro, and you want to trade the GBP/USD pair.
And suppose I ask you, “In this trade, what is a pip?”
You should answer, “One pip is 1/10,000 of one USD per unit of currency being traded. But, there’s no way to know what that’s worth in euro, without some more information.”
Before we go any further, let’s think about that answer.
How do we know that one pip is 1/10,000 of one USD? We know that, because the definition of “pip” (in any non-yen-pair) is 1/10,000 of the quote currency per unit of base currency. In our example, the pair being traded is not a yen-pair, and the quote currency is USD. So, in our example so far, we know that one pip is 1/10,000 of one USD per unit traded.
If the pair being traded were EUR/CAD, then one pip would be 1/10,000 of one CAD per unit traded. And if the pair being traded were USD/CHF, then one pip would be 1/10,000 of one CHF per unit traded. And so forth.
Yen pairs are different, because (1) the JPY is always the quote currency in any yen-pair, and (2) the yen is such a tiny unit of currency, compared to all the other major currencies, that everything having to do with yen is multiplied by 100, in order to make the numbers compatible with the rest of the currencies. So, for example, one pip in a yen pair is 100 times 1/10,000 of one JPY, which equals 1/100 of one JPY.
More on yen-pairs, later.
Back to non-yen pairs in a EUR-denominated account.
In our example above, we determined that one pip is 1/10,000 of one USD per unit of GBP/USD being traded.
You will certainly be trading more than one unit of GBP/USD, so how much will a pip be worth if you are trading, say, 500 units? That’s easy. One pip will be worth 500 times as much.
But, what is that worth in euro?
By now, it should have occurred to you that, if one pip (in our example trade) is a fraction of one USD, and you want to know its value in EUR, all you have to do is apply the current EUR/USD exchange rate. Let’s do that.
First, let’s write 1/10,000 of one USD in the normal fashion, with a $-sign. We write: one pip is $0.0001 per unit of GBP/USD.
For a position size of 500 units, one pip is $0.0001 x 500 = $0.0500 – or simply $0.05
Converting that to EUR is easy: One pip (per 500 units) = $0.05 / the current EUR/USD exchange rate.
Right now, the EUR/USD ask price is 1.1028 —
— so, one pip (per 500 units of GBP/USD) = $0.05 / 1.1028 = €0.045339
If you decided to double your position size, that pip value would double. If you decided to trade only 100 units of GBP/USD instead of 500, then that pip value would be divided by 5. And so forth.
Let’s check this result with the Pip Value Calculator.
We plug in the currency pair, current price, position size, and account currency, and we get:
Returning to yen pairs for a moment, if you have a good grasp of everything discussed above regarding non-yen pairs, then you might want to read this post —
— in which I answered some questions about pip values in yen pairs.