In the world of FX trading, you may see the comments like "I got 100 pips in a month" or "I set my stop loss line at 20 pips”. This article introduces what “pips” is and how to calculate profit and loss using pips to those not familiar with it.
Contents
What is “pip”?
Pip, an abbreviation for “Percentage In Point”, stands for one-hundredth of the smallest unit in each currency.
JPY
Minimum unit = JPY
JPY 1 × 0.01 = JPY 0.01 = 1 pip
1 pip of JPY = JPY 0.01
US Dollar
Smallest unit = 1 cent
1 cent × 0.01 = 0.01 cent = USD 0.0001 = 1 pip
1 pip of USD = USD 0.0001
What is “point” (and how does it differ from pip)?
In the world of FX, the unit “point” is also used in addition to pip. Since it can be troublesome to confuse, we take a look at “point” here.
Point is “the number that is counted as the first digit of the smallest decimal point of the rate displayed by each broker”.
We will use the above rates from XM as an example.
EUR/USD rate is quoted with five decimal places while USD/JPY is quoted with three decimal places. Therefore, the fifth decimal place is the first digit of “point” of EUR/USD, and for USDJPY, it is the third decimal place.
<Example>
EUR/USD 1.20745
USD/JPY 106.507
EUR/USD: USD 0.0001 = 1 pip = 10 point
USD/JPY: JPY 0.01 = 1 pip = 10 point
XM quotes EUR/USD rate with five decimal places or USD/JPY with three. So 1 pip is equivalent to 10 points. However, as shown below, some brokers which quote the rate with four (or two) decimal places employ the system of “1 pip=1 point”.
<Example>
EURUSD 1.2072
USDJPY 106.50
EUR/USD: USD 0.0001 = 1 pip = 1 point
USD/JPY: JPY 0.01 = 1 pip = 1 point
The definition of point may vary between brokers. But many brokers tend to employ the former system, displaying to the fifth or third decimal place of each currency pair. While the definition of point may be inconsistent between brokers, that of pip has consistency.
How to calculate profit and loss using pips
Next, we take a look at how to use pips to calculate profit and loss. Here, I will use an example to explain how much profit and loss you will make when you gain some number of pips in a certain currency pair.
Amount of profit and loss earned =
Amount of currency traded × Base value per pip × Number of pips earned
Base value per pip
Currency pair with JPY = 0.01
Other currency pairs = 0.0001
Example (1)
Account currency: USD
Currency pair: EUR/USD
How much money does a trader make when he/she trades with 100,000 currencies and earns 50 pips?
<Answer>
USD 500.00
<How to calculate>
EUR 100,000 × 0.0001 × 50 pips = USD 500.00
Example (2)
Account currency: JPY
Currency pair: USD/JPY
How much money does a trader make when he/she trades with 100,000 currencies and earns 50 pips?
<Answer>
JPY 50,000
<Calculation>
USD 100,000 USD × 0.01 × 50 pips = JPY 50,000
Why is pip used in FX trading?
One of the reasons why pip is used as a common unit in the forex market is to make transactions easier to understand. Since FX trading involves various currencies with different units, it is necessary to have a common unit which can be used for all currencies. That is why the concept of pip was born.
You may be confused by this unfamiliar unit at first. But you are not alone. The concept of pip is the foundation of FX and a necessary knowledge to conduct transactions in the forex market.
If you still feel it difficult, you have to just understand that, in JPY, 1 pip is equivalent to JPY 0.01 and, in other currencies, 1 pip is equivalent to 0.0001 of the corresponding currency.
Useful tool for profit and loss calculation
I think that calculating profit and loss using pips can be done in your head once you get used to it. However, you may feel insecure until you reach such a level. In case you make a mistake, your trading plan might be distorted. Therefore, I would like to introduce an automatic calculation tool. This tool is provided at XM's official website. Even if you don't have an account with XM, you can use it for free, so please give it a try.
Free-of-charge Profit and Loss Calculator →
<What you can do with this calculation tool>
This tool automatically calculates the rate of your stop-loss and profit-taking lines, and how many pips away from the entry price the rate is. I believe that many traders will find it useful to be able to instantly know the rate and pips by entering stop-loss and profit-taking lines in your account currency.
What information is required
By entering the following information, you can perform profit and loss calculations.
①Account Base Currency
Select your account currency
②Currency Pair
Select the currency pair of your trade.
③Account Type
Select an account type.
(Even if you don't have an account with XM, you can still calculate the correct value by choosing the appropriate amount of currency per lot.)
④Volume in Lots
Enter the number of trading lots (amount of currency).
⑤Open Price
Enter the rate at which you plan to enter (or you have entered).
⑥Set Stop Loss Amount
Enter the stop-loss price in the account currency chosen at 1).
Example: If you want to cut your losses at a rate of USD 500.00, enter "500.00".
⑦Set Take Profit Amount
Enter the profit-taking price in the account currency chosen at 1).
Example: If you want to make a profit of USD 500.00, enter "500.00".
⑧Trade Type
Select whether it is a buy entry or a sell entry.
When you have completed the input, press the green button CALCULATE, and the tool starts the calculation and the following information will be shown.
Calculation results
By completing the input, you can confirm the below calculation results.
A: Stop Loss at
The rate at which the specified stop-loss line is reached.
B: Take Profit at
The rate at which the specified profit-taking line is reached.
C: Stop Loss, Pips
The range of pips to reach the specified stop-loss line.
(How many pips after entry are required to reach the specified stop-loss line.)
D: Take Profit, Pips
The range of pips to reach the specified profit-taking line.
(How many pips after the entry are required to reach the specified profit-taking line.)
E: Pip Value (USD)
The amount of money moved by a 1-pip change
<Calculation Formula>
Pip Value=1 pip(*)/rate × lot size
(*)1pip
Currency pair with JPY = 0.01
Other currency pairs = 0.0001
Example of pip value calculation:
Account currency: USD
1 pip: 0.0001
Trading currency: EUR/USD
EUR/USD rate 1.22260
Lot size: 100,000 currencies (EUR)
Pip Value = 0.0001/1.22260× 100,000 = USD 8.1792
An up or down by 1 pip is equivalent to the change of rate by $8.1792.
This article only introduces the profit and loss calculation tool. But XM has various tools which can be used for other calculations necessary for FX trading. I will explain them in other articles, so please have a look if you are interested.
XM Calculation Tool →
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This concludes the explanation of pips. Thank you for sparing your precious time to read this article.
