Hi all, newbie with a probably dumb question here. I’m struggling to work out how much the position I’m taking is costing in my account base currency. So for example I want to work out how much a particular amount of units translates to in Euros per pip. I know Oanda kinda does this for you but I’m using xm. What calculation do I need to get to the magic number? Thanks
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.
Hi Clint, thanks for your response. It’s really helpful to see it laid out so clearly. One thing I’m struggling with is knowing what to put into the volume field in my MT4 order window to get me in at a sensible level. So say for example I want to risk €8 per pip in a given trade, how do I arrive at the correct volume (lot) size to accurately implement this risk management strategy?
Hi again, Lyndsay
The answer to this question depends on the pair you intend to trade.
Let’s continue with the GBP/USD example in my previous post, but let’s assume that you don’t know the pip-value in euro that was calculated in that post.
In other words, let’s start from scratch.
If you’re not already completely familiar with the Pip Value Calculator, you should study it now, before we continue.
Okay, let’s assume that you now know how to use the Calculator in a straight-forward way. That is, if you know your position size (and the other metrics which the Calculator asks for), then you can calculate the corresponding pip-value.
But, you want to do the calculation in the reverse order. That is, you want to start with the pip value
(one pip = €8) and work backward to the position size.
We can do that.
Let’s assume that the current price of GBP/USD is 1.3057, and the current price of EUR/USD is 1.1028 – the same prices used in the previous post.
Next, let’s plug all the known metrics into the Calculator, leaving the default zero in the Position Size field.
Here’s how it will look –
Now, let’s assume a position size of 100000 units (equal to one standard lot). We’ll enter that number and click “Calculate”.
The Calculator will return the following result –
€9.067827 per pip is not the pip value you want, but we can use ratios (and a tiny bit of algebra) to find the position size that will give you the pip value you want, as follows:
Desired position size / 100,000 units = €8 / €9.067827
This works out as: Desired position size = [ €8 / €9.067827 ] x 100,000
Therefore, Desired position size = 88,224 units of GBP/USD
Since you are now an expert in the use of the Pip Value Calculator, you can do a new calculation using 88,224 units as your position size, and check that the Calculator gives €8 as the result.
If your trading platform requires position sizes in lots, then the answer is 88.224 lots, if 3 decimal places are allowed (or 88.22 lots, if only 2 decimal places are allowed).
One more point.
The current price of the GBP/USD (1.3057 in this example) does not enter into this particular pip value calculation at all. You can prove this to yourself, by leaving the default zero in place (or entering any made-up price of your choosing) and re-calculating. You will get the same result, regardless.
But, the calculator asked for the GBP/USD price, so (being obedient, little traders) we provided it
Thanks a million Clint, that all makes perfect sense. Really grateful for the help. I’m looking forward to learning more and more on my forex journey.
About as thorough an explanation of this as I’ve seen. Nice one
hello thanks for this information, it is very useful