Pip Calculator - A Primary
Forex Tool
To understand why a foreign
exchange trader needs a pip calculator, and why a pip
calculator is such an important tool in forex trading, you need
to know what a pip is. A pip is the smallest change in price
that an exchange rate can make. Since most major currency
pairs, like EUR/USD, GBD/USD, USD/CHF, are priced to four
decimal places (0.0001), the smallest change would be with
regard to the last decimal point.
For most currency pairs, this is one basis point or 1/100 of
one percent. Not all currencies trade to the fourth decimal
point (for example, JPY/USD is 0.01), and the smallest move in
a currency is not always equal to one basis point, but a pip in
forex is always the minimum price movement of a currency
pair.
Depending on the size of the lot you trade
(standard being $100,000; mini $10,000; and micro $1,000), a
pip is worth $10, $1 or $0.1, respectively. Thus, if the
GBP/USD currency pair went up by 150 pips, and you had traded a
mini lot ($10,000), you would make $150. On the other hand, if
you bought EUR/USD at 1.3425 and sold at 1.3415, you be down 10
pips. With one standard lot trade (that's 100,000 units) at
100:1 leverage (which is called the margin ratio) your dollar
loss would have been $100 USD. Don't really need a pip
calculator to figure those transactions out, right?
Okay, but you might appreciate it
if your trading account is in USD, and you want to trade
EUR/GBP. The pip value for currency pairs which have a base
currency other than that of your trading account currency base
can be calculated by converting the second cross rate currency
(in this case GBP) into your account base currency (in this
case USD). In order to convert the pip value to cash value,
you'll need to know the price.
For indirect currency pairs, per
pip values change with market-to-market currency prices, so a
pip calculator would probably be a welcome tool right in this
situation. All you have to do to find out your pip value when
using a calculator is select the appropriate currency pair,
enter the size of the contract and ask price (the opening and
closing rates are usually automatically generated), and you'll
get the average pip value, the profit/loss point and the
absolute dollar value of the profit or loss.
You can find forex calculators
online, and they're not just pip calculators. There are
calculators specific to profit, margin and interest as well,
and they're usually free to use.
Interbank FX
(http://www.ibfx.com/tools/pipcalc.aspx
) offers information on
Forex trading, including a pip calculator. Art Gib is a
freelance writer.
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