Know Forex Pips (Part II)
In order to obtain the dollar value of the pip if the quote currency is anything other than US Dollar, the results must be converted to dollars using the current exchange rate between the quote currency and the US Dollar. Here are a few examples:
Example#1: Consider the currency pair USD/JPY. USD is the base currency. JPY is the quote currency here. Using our formula: Pip value for 1 standard lot of USD/JPY= 100,000 (Lot Size)*1(No of Lots)*0.01(Pip Size) = 1000.
You need to convert this pip value into USD if your account is in US Dollar. The quote currency is in Yen, so the value of 1 pip on a standard lot is also in Yen. The broker will do that for you automatically if you instruct the broker to do so.
You should know that your profit and loss will stay in that currency you made a profit or loss in until you instruct the broker to exchange those currencies into your own base currency. However, lets do it ourselves as well.
Suppose the USD/JPY rate is 101.02. In order to make the conversion to USD, you need the USD/JPY exchange rate. So the exchange rate is 101.02. The Dollar pip value will be 1000/101.02= $ 9.89. Therefore, 1 pip is equal to $ 9.89 in the case of USD/JPY for a standard lot at the exchange rate of 101.02.
Example#2: Now consider the currency pair EUR/GBP. It is a cross currency pair. Meaning it does not involve USD on any side. The base currency in this case is Euro and the quote currency is British Pound.
Here, the quote currency is in British Pounds, hence the value of pip is also in Pounds. Pip value for a standard lot of EUR/GBP= 100,000 (Lot Size)*1 (Number of Lots)*0.0001(Pip Size) = 10.
You need the GBP/USD exchange rate in order to convert into USD. Suppose the GBP/USD exchange rate is 1.8465. Dollar pip value will be 10*1.8465=$18.46.
Third Example: The base currency is Euro in the currency pair EUR/USD. The quote currency is in USD so you wont have to make any conversions. Pip value on a standard lot=100,000(Lot Size)*1(Number of Lots)*0.0001(Pip Size) = $10 per pip.
Surprisingly, leverage does not affect the pip value. Leverage chosen by the trader whether it is 50:1, 100:1 200:1, 400:1 or somewhere in between, has absolutely no bearing whatsoever on the pip value. However, the lot size, amount of lots traded and the specific currency pair traded will certainly affect the pip value.
The exchange rate for any currency pair is expressed in the form of bid/ask. For example the EUR/USD exchange rate might be 0.9955/0.9959. The first number is the bid price that you will get if you sell Euros against US Dollar. The second number is the ask price, the price at which the broker will sell you Euros against US Dollar.
The difference between the bid and ask price is known as the spread. This is the brokers profit. Sometimes there can be slippage also. New traders often think that the difference between the price they see on their charts and the price the broker quotes them is slippage. This is wrong. Your charting software and broker prices are two different things. - 23226
Example#1: Consider the currency pair USD/JPY. USD is the base currency. JPY is the quote currency here. Using our formula: Pip value for 1 standard lot of USD/JPY= 100,000 (Lot Size)*1(No of Lots)*0.01(Pip Size) = 1000.
You need to convert this pip value into USD if your account is in US Dollar. The quote currency is in Yen, so the value of 1 pip on a standard lot is also in Yen. The broker will do that for you automatically if you instruct the broker to do so.
You should know that your profit and loss will stay in that currency you made a profit or loss in until you instruct the broker to exchange those currencies into your own base currency. However, lets do it ourselves as well.
Suppose the USD/JPY rate is 101.02. In order to make the conversion to USD, you need the USD/JPY exchange rate. So the exchange rate is 101.02. The Dollar pip value will be 1000/101.02= $ 9.89. Therefore, 1 pip is equal to $ 9.89 in the case of USD/JPY for a standard lot at the exchange rate of 101.02.
Example#2: Now consider the currency pair EUR/GBP. It is a cross currency pair. Meaning it does not involve USD on any side. The base currency in this case is Euro and the quote currency is British Pound.
Here, the quote currency is in British Pounds, hence the value of pip is also in Pounds. Pip value for a standard lot of EUR/GBP= 100,000 (Lot Size)*1 (Number of Lots)*0.0001(Pip Size) = 10.
You need the GBP/USD exchange rate in order to convert into USD. Suppose the GBP/USD exchange rate is 1.8465. Dollar pip value will be 10*1.8465=$18.46.
Third Example: The base currency is Euro in the currency pair EUR/USD. The quote currency is in USD so you wont have to make any conversions. Pip value on a standard lot=100,000(Lot Size)*1(Number of Lots)*0.0001(Pip Size) = $10 per pip.
Surprisingly, leverage does not affect the pip value. Leverage chosen by the trader whether it is 50:1, 100:1 200:1, 400:1 or somewhere in between, has absolutely no bearing whatsoever on the pip value. However, the lot size, amount of lots traded and the specific currency pair traded will certainly affect the pip value.
The exchange rate for any currency pair is expressed in the form of bid/ask. For example the EUR/USD exchange rate might be 0.9955/0.9959. The first number is the bid price that you will get if you sell Euros against US Dollar. The second number is the ask price, the price at which the broker will sell you Euros against US Dollar.
The difference between the bid and ask price is known as the spread. This is the brokers profit. Sometimes there can be slippage also. New traders often think that the difference between the price they see on their charts and the price the broker quotes them is slippage. This is wrong. Your charting software and broker prices are two different things. - 23226
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currencies. Try These 1500 Pips A Day Forex Signals From Heaven. Know Forex Rebellion!
posted by X - Men @ 7:05 AM
0 Comments
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home