It is time to take a look at math. You have certainly heard the terms “Pips”, “Pipette”, “batch”; we will now explain to you what they are and how their value is calculated.
Take the time to understand all this information, which represents the basic knowledge of every trader.
What is a Pip? What is a “Pipette”?
The unit of measurement expressing the change in value between two currencies is called the “Pip”. If the EUR/USD moves from 1.2250 to 1.2251, this increase of USD 0.0001 represents ONE PIP. A pip represents the last digit after the decimal point of a quotation. Most pairs have 4 decimals except for exceptions such as pairs associated with the Japanese yen (which have only two).
there are brokers who value currency pairs above the standard to 2 or 4 decimal places (3 or 4 decimal places). They therefore evaluate in fractions of Pips or “pipettes”. For example, if the GBP/USD moves from 1.51542 to 1.51543, the 0.00001 USD movement represents ONE PIPETTE.
As each currency has its own relative value, it is necessary to calculate the value of a Pip for each currency pair. In the following examples, we will use a rating to 4 decimal places. In order to explain the calculations as clearly as possible, the exchange rates will be expressed as ratios (EUR/USD at 1.2500 will be noted: “1 EUR/ 1.2500 USD”)
Example of an exchange rate ratio: USD/CAD = 1.0200. Read as: 1 USD to 1.0200 CAD (or 1 USD/1.0200 CAD).
(Change in value of the quotation currency) X the ratio of the exchange rate = value in Pips (expressed according to the base currency)[0.0001 CAD] x [1 USD/1.0200 CAD]
Or Simply[(0.0001 CAD) / (1.0200 CAD)] x 1 USD = 0.00009804 USD per unit exchanged
Following this example, if we traded 10,000 USD/CAD units, then a movement of one Pip of the exchange rate would give approximately a 0.98 USD change in the position value (10,000 units x 0.0000984 USD/unit). (We say “approximately” because the value of each Pip changes according to exchange rate fluctuations).
Here is another example using the Japanese yen as the quotation currency:
GBP/JPY at 123.00
Note that this currency pair has only two decimal places to measure changes in the value of Pips (the vast majority of other major currencies have four). In this case, a Pip moves by 0.01 JPY.
(Change in value of the quotation currency) X the ratio of the exchange rate = value in Pips (expressed according to the base currency)
[0.01 JPY] x [1 GBP/123.00 JPY]
Or simply:[(0.01 JPY) / (123.00 JPY)] x 1 GBP = 0.0000813 GBP
Therefore, by trading 10,000 GBP/JPY units, each change in the Pip value is worth approximately GBP 0.813.
Identify the value of Pip Value on your account’s nomenclature
The last question that arises when representing the Pips value of your position is the following: “What is the Pips value in the currency of my account? It is indeed a global market and not everyone has an account credited in a single currency. This means that the value in Pips will have to be converted into the currency of your account.
This calculation is certainly the easiest of all; it is simply a matter of multiplying/dividing the “found Pips value” by the exchange rate of the currency of the account in question.
If the “Pips value found” is the same currency as the base currency in the exchange rate quotation:
Using the example of GBP/JPY above, let’s convert the Pip value found from GBP 0.813 to the value of US dollars on GBP/USD at 1.5590 as the exchange rate. If the currency to be converted is the exchange rate quotation currency, all you have to do is divide the “found Pips value” by the corresponding exchange rate ratio:
0.813 GBP per Pip / (1 GBP/1.5590 USD), or
[(0.813 GBP) / (1 GBP)] x (1.5590 USD) = 1.2674 USD per Pip.
So, for any movement of.01 Pip on the GBP/JPY, the value of a position of 10,000 units changes by approximately USD 1.27.
If your conversion currency is the base currency of the exchange rate conversion report, multiply the “found Pips value” by this exchange rate conversion report.
Using our example of the USD/CAD quoted above, we want to find the Pips value of USD 0.98 in New Zealand dollars. We will use 0.7900 as the conversion rate ratio:
0.98 USD per Pip X (1 NZD/0.7900 USD) or
[(0.98 USD) / (0.7900 USD)] x (1 NZD) = 1.2405 NZD per Pip
movement For each Pip movement of 0.0001 on USD/CAD from the example below, your position of 10,000 units changes in value by approximately 1.24 NZD.
Even if you are not very good at mathematics, these considerations about the value of Pips leave you perplexed: “Do I really need them to make money? The answer is NO. Almost all Forex brokers will provide you with these values automatically but it is always good to know how they work.
In the next section, we will discuss the accumulation of these seemingly insignificant figures.