One of the most common risk evaluation methods while carrying out forex trading involves determining the pip value. Forex trading deals with the exchange of currencies which, in turn, benefit internal trade. Therefore, the role of a pip is involved in calculating the rates that individuals in the market pay when they carry out trading of currencies. This blog presents a comprehensive guide about the role of Price interest point, or pip value, in the financial market:
What is pip value?
Price interest point, or pip, is essentially a representation of the movement that a currency pair can make in the present market conditions. The pip value denotes a position’s gain or loss. Therefore, it is used for forex margin calculators. In other words, the pip value is a measurement tool that can detect the most basic or smallest price movements. Pip values represent such small changes that they are usually derived from the fourth decimal point of a currency price. For convenience, the pip values are divided into three categories, micro lots, mini lots, and lots. A Forex trading calculator usually calculates the pip value with the help of lots. A single lot consists of 100,000 units of a currency, the mini lot is 10,000, and finally, the micro lot chimes in at 1,000 units.
Example of pip value
Consider the following example: A currency price is pegged at 1.1003. After a time, the price changes to 1.1006. Therefore, the pip value, in this case, will be 3. This shows that the value of a single pip can be represented by 0.0001. In addition to this, finding a pip value between a change in the currency pair involves subtracting the two values.
Pip Value Calculation When Trading in a USD Account
When one decides to carry out their trading by opening an account that trades in US dollars, then the currency pairs will contain the US dollar as the “quote” currency. The pip value, in this case, will be decided as per the lots. For a single lot (100,000), the pip value would be $10. For a mini lot (10,000), it is $1, and finally, the micro lot (1,000) will equal $0.10. In addition to this, there are changes in the pip value only if there is a 10% or more rise or fall in the US dollar.
Pip Value Calculation for a Non-USD Account
For an account that has a non-USD currency listed as the quote currency, the pip value will change accordingly if we take, for example, EUR/CAD. The quote currency here is CAD. The values listed for each lot are CAD 10 for a single lot, CAD 1 for a mini, and CAD 0.10 for a micro lot. The pip value would be to divide the pip worth of the lot by the exchange rate.
Pip Value For Other Currency Pairs
Currency trading through a USD account also allows trading using two different currencies in the pair. For any currency calculating the value of pips will involve the following steps: First, divide a single pip unit by the currency pairs’ current market value or exchange rate. Multiply the result by the figure of the lot size. That is, if it is a standard, mini or micro. In case one wants to convert EUR into USD. They would have to divide the fixed EUR pip rate by the exchange rate in the EUR/USD pair.
The process of calculating the pip value can be a challenge at times. However, several platforms have resources like a forex trading calculator, which will automatically calculate the pip value. Thus, one can conduct trading seamlessly with the right information and expert guidance.