What is the pip value – how do we figure this out?
GBP|USD current exchange price: 1.61250
The Base currency is GBP. The quoted currency is USD. Assuming your broker allowed you to trade just 1 unit, in this example the Base would be GBP 1, and the quote was USD 1.6125. Meaning £1 would get you $1.61
As we all know, no broker allows you to trade that small (fractions of a penny!).
Right, now armed with these basics, we now want to find out what each PIP value is. That’s to say, placing a usual sized trade with your broker, how much (monetary) is one PIP move in the exchange price on the pair in question?
This is the basic formula to work out what each PIP is worth in the “Term Currency”(i.e. not the traders denominated trading currency):
- ( PIP / Exchange Price ) x Lot Size (Units) = Value Per PIP
So placing a 0.10 (10,000 units) on the price we just looked at on GBP|USD looks like this:
- ( 0.0001 / 1.61250 ) x 10,000 = $0.62(term currency – not denominated trading currency)
Pretty simple stuff! Let’s look at some hypothetical traders so that we can put this into practice and see whether PIPS is really a standardised way in determining a traders profitability…
So what should I look at?
“R Multiples” are the best and most standardised way in gauging what someone has risked for the reward they have made. This fixes the issue of having to calculate what each PIP was worth (as an observer) and also allows “you” (as the trader) to see what you’re risking relative to the reward, as a ratio.