How to calculate a PIP value in forex online trading?
Before one will learn how to calculate a pip value in forex online trading, a forex trader must understand what pip is. Surprisingly, we encounter “experienced” forex traders that after a year or more of online trading still make confusion on what PIP is and how to calculate its value, and this is the basic tool to manage your risks correctly during forex online trading.
In forex online trading, the PIP is always the forth digit after the decimal point in the currency exchange rate, for example in the price quote 1.30010 of the EURUSD pair, the pip is the forth digit after the decimal point. In the forex online trading market, there are brokers which provide their customers quotes with only four digits after the point, reasoning that kind of choice by convenience and comfort to a trader, the real reason behind this choice of the forex broker is that by not showing you the last digit, which is a decimal of a PIP, the broker can cut a bit of the trader’s profit and increase a bit his loss.
So think twice before choosing a four digit quotes broker!
So how do we calculate a PIP value in forex online trading?
There are few methods; our preferred one is by a simple formula, which will help you avoiding the confusions!
Just take the trade size, divide it by 10,000 and you will get the PIP value in base currency
Example 1: A trade of 1 Lot (100,000$) of EUR/USD = 100,000/ 10,000 = 10$
Example 2: A trade of 0.1 lot (10,000$ of EUR/USD = 10,000/10,000 = 1$
As we said before, the PIP is the forth digit after the point, so let’s assume we opened a Long position on EUR/USD of 1 lot, on 1.30000, and closed this position on 1.30050, we earned 5 PIPs, which are 50$.
Remember, do not open any trades in forex online trading without understanding how much money you will pay / earn on every pip the market moves in your direction or against you.
By understanding this you will make first step towards the right risk management in your forex online trading.