Struggling with calculation

Beginner Questions
1

if i buy 1 aud/chf at 0.0678

to work out pip value in aud = 1/0.678/10000 =0.0014759

now if i want to convert this price of into gbp

i have to use the price of GBP/AUD which lets pretend is ask 1.0034 1.0031 bid
now reading the notes in the school…the base is not the same

so i have to divide
which means 0.0014759 / 1.0031 = 0.01471

my questions are :
1 did i use the right quotation,i used the ask price.
2 was i meant to divide.

i just can’t get my head around this.

ps. those values used were just made up, please ignore their factual representation, its the process i am trying to come to terms with .

thanks.

2

Hello,

Let me give you the [B]simplest[/B] method for manually calculating pip-values in a GBP-denominated account. This method is so simple that [I]you can manually do the calculation faster than someone using the Pip-Value Calculator.[/I]

• For any currency pair (let’s call it XXX/YYY) [I][U]except EUR/GBP, and XXX/JPY (yen-pairs)[/U]:[/I]

the pip-value for a 1-mini-lot position (10,000 units)
in a GBP-denominated account is:

[B]£1 ÷ GBP/YYY[/B]

• For EUR/GBP, the pip-value is £1

• For any yen-pair (a pair of the form XXX/JPY), the pip-value is £100 ÷ GBP/JPY

• For a 1-standard-lot position (100,000 units), [I]multiply[/I] the pip-values calculated above by 10.

• For a 1-micro-lot position (1,000 units), [I]divide[/I] the pip-values calculated above by 10.

These formulas are precise – they are not approximations used to cut corners in order to save time.

Technically, you should use the ASK price in each of these formulas. But, since most of us watch BID-price charts, instead of ASK-price charts, it’s easier to just slap the BID price into the formulas. This amounts to a slight approximation of the mathematically rigorous pip-value, but you can ignore the slight error which this introduces.

In other words, don’t agonize over whether to use BID prices or ASK prices when doing these calculations. If you calculate the pip-value both ways, you will find that a 5-pip difference (spread) between the BID and ASK results in a difference of about 1/100 of a penny in the pip-value for a 1-mini-lot position.

Maybe, in another post, we can get into the weeds and go through the mathematical derivation of the formulas I’ve given you above. But, it’s a bit of a bother.

For now, use the Pip-Value Calculator (which is accurate, by the way) to check and double-check the formulas I’ve given you above, until you are confident they are equally accurate.

If you want to continue to puzzle this out for yourself, here’s a clue. You said –

However, the price of GBP/AUD has no bearing on this pip-value calculation. Pip-values depend entirely on the quote-currency in the pair you are trading (CHF in this case), and your account currency (GBP).

One last (trivial) point:

In a lot of calculations performed with the Pip-Value Calculator, the calculator asks you for unnecessary information. To illustrate this, let’s use the example from your post, with current actual prices.

You want the pip-value for (let’s say) 10,000 units of AUD/CHF.

A few minutes ago when I checked, AUD/CHF = 0.77458, and GBP/CHF = 1.25548

The Pip-Value Calculator is going to ask you for both of those prices. But, the price of AUD/CHF is completely unnecessary for calculating the correct pip-value, as you will see in a moment.

Let’s plug this info into the Pip-Value Calculator. Here’s how it looks:

To prove to yourself that the price of AUD/CHF is unnecessary in this example, change the price and re-calculate. You’ll get the same pip-value every time.

Even if you enter a totally ridiculous price, like 10000.0000, you’ll get the same result: £0.7965 per pip per mini-lot.

If you leave that field blank, however, the Pip-Value Calculator will freak-out and demand that you enter a “valid” price. So, just enter any number that strikes your fancy.

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3

Thanks, very informative.

But still a little niggle, my currency is GBP. when buying AUD/CHF, i interpret that to mean that in reality,
i am buying AUD with CHF
and when selling, i am selling AUD for CHF

so either way, even if it is only for a nano second, prior to the deal, and upon closing the position.
for an ASK( BUY)
i somehow have to get my money (GBP)
converted to CHF when i buy,
and then converted from AUD .to GBP when i close the ask position
(on a AUD/CHF position, surely the only currencies in the actual transaction are AUD and CHF)

or if i am selling AUD/CHF .(BID) again my money is GBP
i need to convert my GBP to AUD…first before i exchange for chf
and then convert from AUD to GBP when i close the bid position
again this is still a trade of AUD and CHF.

so unless AUD/CHF EXACTLY CORROLATES with GBP/CHF AND GBP/AUD
then surely i need to take into account these other pairs, when i am doing true pip conversion

you see i’m not interested in how much the movement of a pip of CHF makes wrt AUD.
the end result i am interested in when buyin g AUD/CHF, is how much the movement of a pip in CHF moves GBP
which may be slightly different to how much it moves when dealing directly with the pair BGP/CHF

like i say, i dont really know, that’s for sure.
i dont know the mechanics behind how legitimate brokers open and close these deals.
maybe even on an STP ECN, the orders are just swapped with counter orders which means not currency needs converting.

wow there are a lot of possible scenarios.

maybe im missing something, i will certainly play around with your calculations. for now.
thanks.

4

In the retail, off-exchange forex market (our market), [B]there is no buying or selling of currencies[/B] or currency pairs, although we carelessly use the terms “buy” and “sell”, because those terms are simpler than saying “take a long position” or “take a short position”.

When you take a long position (“buy”) AUD/CHF, you do not “buy AUD and sell CHF”, although many authors and websites (including this website) will tell you that’s exactly what you’re doing. They are wrong. Your broker doesn’t even have AUD or CHF to sell to you, or buy from you.

Forget the idea of converting base currency into quote currency, or vice versa. It does not happen.

Forget the idea of converting your account currency into any other currency. It does not happen.

When you take a position, long or short, you are simply using your account currency to place a bet, that something will either go up or go down. That [I]something[/I] happens to be a currency pair. But, the bet is no different from any other form of bet. The money you bet (GBP in this case) is not used to buy the thing you are betting on.

[B]So, you have been trying to calculate a bunch of [I]fictitious currency exchanges[/I] which simply do not occur. And, in the process, you are getting yourself unnecessarily tangled up in math.[/B]

In the case of your AUD/CHF example, the current value of one Australian dollar is quoted in terms of Swiss francs. In other words, the pair you are trading carries a “price tag” in Swiss francs. But, your account is denominated in GBP. Everything that occurs in your account is quoted in GBP – your balance, your equity, your profits, your losses, etc.

So, changes in the value of the AUD/CHF pair that you are trading – that is, changes in the Swiss franc “price tag” – have to be converted into your GBP account currency. And it’s a [I]bookkeeping conversion,[/I] done digitally. [B]There is no actual conversion of Swiss francs into pounds sterling, or vice versa.[/B]

That conversion – from a price-change in francs to a price change in pounds – is the [I]only[/I] bookkeeping conversion which takes place.

In other words, as I said in my previous post, it is only the quote currency (CHF) of the pair you are trading (AUD/CHF), and your account currency (GBP), that determine the pip-value in this trade.

Think carefully about that fact. It means that [I]every pair[/I] in which the CHF is the quote currency will have exactly the same pip-value. You can run some experiments using the Pip-Value Calculator to prove this to yourself.

I know that the Babypips School has misled you into believing that a retail forex trade involves the “buying of a base currency” and the simultaneous “selling of a quote currency” (or vice versa), and that this buying-and-selling involves the conversion of the currency being “sold” into the currency being “bought”. Therefore, math has to be employed to account for this conversion. That scenario is wrong, it’s misleading, and it’s regrettable. The School should be cleaned up to get rid of this erroneous teaching.

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5

Wow… the main thing is you have cleared up my understanding of these ‘math’ issuse, i can now safely and happily let it go and move onto more productive areas.

Thanks so much for actually understanding my predicament, and educating me in the process.

6

Best of luck with your journey.

As you have discovered, forex education is largely self-taught. But, from time to time along the way, it’s necessary to ask for some help.

Never hesitate to ask.

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