How to Use a Pip Calculator to Determine Pip Value and Risk
One key to forex trading success is accurately calculating the real value of each pip movement to properly size positions and manage risk. A pip calculator is an essential tool to help determine pip worth based on the currency pair, trade size and other factors. Here we explain what pips are and how traders can effectively utilize a pip calculator.
What is a Pip in Forex Trading?
Pip stands for “percentage in point” or “price interest point” and represents the smallest increment that a currency pair quote can change by.
Most forex pairs are priced to 4 decimal places like 1.2563. The 4th decimal place is the pip. For pairs like USD/JPY that are quoted to 2 decimals, the 2nd decimal digit is the pip.
As the smallest unit of price movement, understanding exact pip value is critical for proper position sizing and stop loss placement.
How a Forex Pip Calculator Works
A pip calculator determines pip value based on:
- Currency pair traded
- Trade size – number of micro lots
- Account currency
It uses these inputs to calculate value per pip based on exchange rates.
For a EUR/USD trade of 0.01 lots on a USD account, the pip value is approximately $1. 0.01 micro lots represent 1,000 units. Multiply by pip = $1 per movement.
Use a pip calculator to determine the value of each pip move in your account currency.
Why Forex Traders Need a Pip Value Calculator
There are two main reasons traders need to use a pip calculator:
- Calculate position size – Knowing value per pip lets you risk only appropriate capital for your stop loss tolerance and account size. You can determine proper trade size in micro lots.
- Calculate stop loss – A pip calc shows how much each pip move is worth. You can then set stops at reasonable loss thresholds for your risk appetite and trade size.
Without knowing exact pip value, it’s impossible to properly manage trading risk. Running positions too large for tolerable loss per pip is a recipe for account failure.
How to Use a Pip Calculator in 4 Steps
Using a pip calculator takes just a few quick steps:
- Select currency pair – like EUR/JPY or GBP/USD
- Enter trade size in micro lots – typically 0.01 to 10 lots
- Choose account currency – like USD, EUR, GBP etc.
- View value per standard and fractional pip
The calculator outputs the value of a 1 pip movement in your account currency. Use it to determine proper trade sizing and stop loss levels.
Pip Calculator Examples
Let’s walk through some pip calculator examples:
Trading 0.02 lots EUR/USD on a EUR account
- 1 pip = 0.20 EUR (0.0002 lots x EUR 1 per pip)
Trading 1.1 lots USD/JPY on a USD account
- 1 pip = $1.10 (0.01 lots x $1 per pip x 1.1 lots)
Trading 0.4 lots GBP/USD on a USD account
- 1 pip = $4 (GBP/USD pip = 0.0001 x 0.4 lots x exchange rate)
Adjust the inputs to match your trade criteria. The calculator does the hard work of determining pip worth.
Q: What is a Pip Calculator?
A: A pip calculator is a tool that helps traders calculate the value of a pip in their trading account’s base currency. It is commonly used in forex trading to determine the true value of a pip in the currency pair you are trading.
Q: How does a Pip Calculator work?
A: A pip calculator uses the decimal point in percentage (or pipette) to calculate the value per pip. It takes into account the lot size, the base currency, and the pair you are trading to determine the value per pip.
Q: What is a Pip?
A: A pip is a unit of measurement that represents the smallest possible price movement in a currency pair. It is usually denoted by the fourth decimal place in most currency pairs, except for Japanese yen pairs where it is the second decimal place.
Q: How do I calculate the value of a pip?
A: To calculate the value of a pip, you can use a pip calculator. Simply input the lot size, the base currency, and the pair you are trading into the calculator, and it will tell you the value in your account’s base currency.
Q: What is a lot size?
A: A lot size refers to the volume of a trade in forex trading. It determines the magnitude of the price movement for each pip. The standard lot size is 100,000 units of the base currency, but forex brokers also offer ‘fractional pip pricing’ where smaller lot sizes, such as 0.01, are available.
Q: How can I use the pip calculator?
A: To use the pip calculator, you need to input the lot size, the base currency, and the pair you are trading. Once you have entered these values, the calculator will help you determine the value per pip in your account’s base currency.
Q: Why is it important to know the value of a pip?
A: Knowing the value of a pip is important because it allows traders to accurately calculate their potential profits or losses in a trade. It helps them understand the true value of their trades and make informed decisions based on their risk tolerance and trading strategy.
Q: What is fractional pip pricing?
A: Fractional pip pricing is a pricing system offered by forex brokers that allows traders to trade in smaller lot sizes, such as 0.01. It allows for more precise calculations of the value of a pip and offers more flexibility in position sizing.
Q: What is FXTM?
A: FXTM is an abbreviation for ForexTime, a global forex broker that offers a wide range of trading services and tools, including a pip calculator. It is known for its competitive spreads, flexible trading conditions, and user-friendly trading platforms.
Q: Why is understanding the value of a pip important?
A: Understanding the value of a pip is important because it provides traders with a deeper understanding of a currency price’s movements. It helps them analyze and interpret price charts, assess risk, and make appropriate trading decisions based on their trading strategy.
Conclusion
Understanding pip value is essential for calculating proper position sizing and stop losses. A pip calculator simplifies the process and removes guesswork. Input your specific trade details and account currency to determine exact pip worth. Use the outputs to define appropriate trade size and stops for your risk appetite. Managing positions based on precise pip value will improve trading results.