How to easily calculate the value of a Forex pip using a calculator and formula
The value of one Forex pip plays a significant role in choosing the right trading volume. A trader must clearly understand how resilient their position is to the trend and what price fluctuations they can easily withstand.
It is this concept that forms the basis of some trading strategies and allows you to set a specific profitability level for transactions.
A Forex pip is equal to the last digit in a currency pair's quote; its specific value depends on the volume of the transaction being made; the calculation is made in the quoted currency in the currency pair.
For a two-digit quote it is 0.01, for a three-digit quote it is 0.001, and for a four-digit quote it is 0.0001.
Currently, the most popular quotation is the five-digit one; in this case, you should also focus on the last digit, as shown in the photo.
Specific examples will help to understand this concept more clearly.
Accordingly, when the volume changes, the value of one point also changes; if a transaction is made with a volume of 0.1 lot, then a Forex point will in this case be equal to only 1 dollar.
It's a different story when dealing with five-digit quotes, where the figure is reduced tenfold, and a one-point move can be worth $1, even though the trade was a single lot.
Brokers often use a five-digit quote on their trading platform, but prefer to display the spread at the fourth digit to visually reduce the commission charged. This should be taken into account when comparing commissions across different brokers.
Trading on cent accounts also has its own peculiarity: in this case, so-called micro lots are used. 100 micro lots equal one standard lot, or 0.01. This peculiarity requires some familiarity after working on a demo account.
In the case of cent accounts, the value of one point will also decrease by 100 times, and if we take the same EUR/USD currency pair, then when trading 1 micro lot and a five-digit quote, 1 point will be equal to 0.01 dollars, or, more simply, 1 cent.
The value of one forex pip for any currency pair.
To calculate the value of a forex point in any currency pair, you need to use a simple formula.
For pairs where the base currency is the US dollar 100,000 x RP / K where,
RP – the size of a point depending on the number of characters in the quote.
K – the currency quote itself.
For example, the cost of a point for USD/JPY at a rate of 78.41 will be:
100,000 x 0.01 / 78.41 = 12.75 US dollars.
If we consider the example in relative figures, then to buy one lot in dollars we will need 7,841,000 yen, the rate changes to 78.41 or by one point we have 7,842,000 per 1,000 yen, as a result this is still the same 12.75 US dollars.
More complicated is the calculation for cross currencies, for example, EUR/CHF, at a rate of 1.2015, that is, to buy this lot we will need 120 150, which means that one point, in this case, is equal to 10 Swiss francs.
We find the cross rate of the Swiss franc to the US dollar, let it be 1.0470, and get the cost of one forex point on EUR/CHF – 1.04 US dollars.
Typically, such calculations are only required for theoretical work. In the trader's terminal, all values are automatically converted to your account currency. For example, if you open a 0.1 lot trade on USD/JPY with a 2-pip spread, a loss of $2.55 will immediately be displayed.
Currently, there is no need to calculate this parameter yourself; you can use the trader's calculator - this tool will do everything for you, and for several currency pairs at once.
The value of a Forex pip directly depends on your trading volume and the instrument you are trading. You should also keep in mind the number of digits in the quote.
