How Does A Pip Calculator Simplify Your Forex Trading?
Forex is one of the world’s most volatile markets, where you can make thousands of dollars quickly with the right knowledge and decision. However, even a small mistake can make you lose a hefty amount. Therefore, in order to navigate the forex market with ease, you should keenly monitor even the minutiae of pip movements, but that’s not enough; you should also know how to calculate the monetary value of each pip because only then you will be able to find the actual profit or loss you will make while trading a currency pair. For this, you will have to use a pip value calculator, but we’ll come to that later, as we must first understand some basic details about Pips and how to calculate their value.
What is a PIP?
A pip is the smallest possible price movement that can occur in forex trading. It is derived from the word ‘percentage-in-point’ and represents the tiniest fluctuation in the value of the currencies, the very essence of which can mean the difference between winning and losing a trade.
Of course, we all are here to make a profit, and the pip value can serve as a key metric to understand whether one should open a particular position. For a new trader, a pip can appear to have a tantalisingly small value. Still, seasoned traders know that even the slightest pip or point variation can result in potential profits or losses, making pip an extremely crucial unit of measurement.
How to Calculate PIP Value?
Calculating the pip value is a more complex process than it seems. On top of it, the impact of currency fluctuation is not uniform across different trading platforms or forex brokers, which adds another layer of complexity to the already intricate process. However, don’t be disheartened; we will try to learn it the easiest way. However, before that, you need to know the difference between pips and pipettes.
Many traders take it as one and the same thing, but it’s not, and you must know the difference before you start trading.
You already know what a pip is! It is the smallest movement in the value of a currency pair. On the other hand, a pipette is one-tenth of a pip. While a pip is typically equal to 0.0001 of a currency pair, a pipette is equal to 0.00001.
To calculate the value of a pip, you need to divide one pip by the value of a currency pair. After that, you should multiply the resulting value by the number of base units, such as USD or EUR.
You should note that the value of a pip is not constant across different currency pairs. If your account is denominated in the US Dollar, the pip value of a currency pair where the quoted currency is USD will remain fixed at $10 for a standard lot, $1 for a mini lot, and $0.10 for a micro lot. In such scenarios, this fixed value can serve as a reliable baseline for calculations. However, if USD is the base currency or isn’t involved in the pair, you need to calculate the value manually by using the above-mentioned formula.
Example of PIP Value Calculation
Let’s take a look at an example with USD/EUR. If a trader goes long on USD/EUR at 1.6250 and the exchange rate moves to 1.6280 on a standard lot, that’s a movement of 30 pips in a trader’s favour. That could result in a profit if they exit the position at the right time. However, if the exchange rate falls to 1.6220, that’s a movement of 30 pips against the trader, potentially resulting in a loss.
The value of a pip can be calculated by (0.0001/1.6280) x 100,000 = $6.14
This means for every pip movement, you will make or lose $6.14
In the above example, the pip has moved by $30, which is going to be a profit or loss of 30x $6.14 = $184.2
How Does a PIP Calculator Work?
The pip calculator takes into account different variables, such as:
- Asset Class (Forex, Stocks, Indices, Cryptos or Commodities)
- Instrument (the currency pair you are trading or plan to trade)
- Base Currency
- Trade size in lots
Once you have entered these values, the calculator will automatically compute the pip value of each position. This information can be used to determine the potential profit or loss as well as to identify the correct place to put a stop-loss.
Advantages & Disadvantages of PIP Calculator
PIP Calculators offer a number of advantages, some of them are:
- PIP Calculators can instantly determine the numerical value of a PIP for a given currency pair allowing traders to quickly and easily calculate the possible profit or loss in a trade. And, if you want to calculate the profits in the currency of your choice, you can easily do so using a forex profit calculator.
- With the help of a pip calculator, traders can simplify the tracking of open positions. Since pip calculators can automatically calculate changes in the pip value due to exchange rate fluctuations, traders can stay informed about their open positions.
- Using a pip calculator, traders can also easily calculate the pip value in other currencies. This is especially helpful when a trader has opened positions in a currency pair that is not their own.
- PIP Calculator can also be used to calculate a trade’s risk-to-reward ratio, helping traders manage their risk effectively.
- PIP Calculator can also save trades a lot of time and effort that would otherwise be spent manually calculating the pip value.
Although pip calculators are incredibly useful for every trader, there are also some downsides:
- If a trader solely relies on a pip calculator, he/she may never understand the dynamics behind fluctuations in the pip value. Therefore, it is important to use other trading calculators to determine other important values of the trade.
- The forex market is a rapidly moving market with constantly fluctuating prices. As a result, pip calculators may only be able to keep up with these changes in real-time and sometimes give inaccurate output.
- PIP Value Calculators don’t consider other important factors, like spreads, commissions, slippage etc., and thus cannot accurately measure profitability.
Tips for Using a Pip Calculator
Here are a few tips you should keep in mind while using a pip calculator:
- Make sure that you give the right input to your pip calculator. You must know the base and quote currency in a pair you are interested in trading. You should also use the right number of decimal places because even the slightest mistake can give inaccurate results.
- Find a calculator that’s easy to use. This will help you carry out the calculations quickly and easily.
- You should be aware of the right lot size for your trade, as this will also affect the pip value.
- Never take the final result of a pip calculator for its face value. You may get a different outcome when you trade currencies in real-time; calculators are only to help you in making a sound judgement rather than to show you the final outcome.
- Use the pip calculator in conjunction with other tools for the best results.
The significance of understanding pip value cannot be overstated. Since forex trading requires a shrewd understanding of these nuances, any trader worth their salt should know the intricacies of pips and their role in forex trading. Besides the ability to accurately predict price movements, a trader must also have an idea about how many pips a pair can move in a particular direction; only then will they be able to make profits. If you truly want to master the art of trading, you should always calculate the pip value before entering any trade, as this will not only help you estimate the potential profit or loss but can also assist you in implementing stop-loss and take-profit levels accurately.
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