How to Calculate Pips in Forex?

Being essential in both gold and currency trading, we take a look at how to read, interpret and calculate Pips in this blog post.

November 23, 2021

How to Calculate Pips in Forex and Gold Trading?

Pip is short for "Percentage in point" or" Price interest point." These terms mean the minimal price move a currency can make, and a pip is the fourth decimal place.

One pip = 0.0001 of the quote currencies. A pip is a move in the quoted currency's price, equal to 1/100th of one percent or .01% multiplied by 100. For example, if EURUSD moves from 1.3900 to 1.3899, that represents a loss of one pip and a price change of -0.0001.

Let's continue with our example below:

  • EURUSD     @ 1.3900 = $1,390
  • EURUSD     @ 1.3899 = $1,389

The difference between the two prices is just one pip (or0.01%), worth $13 for a currency pair with an average daily trading volume of100,000. The pip value will increase or decrease according to the market's volatility.

If EURUSD moves from 1.3900 to 1.3899, it represents a loss of one pip and a price change of -0.0001; however, if EURUSD moves from 1.3900to 1.3999, that means a loss of five pips and a price change of -0.0005; which equals $50 for that currency pair with an average daily trading volume of 100,000.

How Do Pips Work?

As outlined earlier, a pip is a fundamental foreign exchange element (forex). Exchange quotations are disseminated through forex pairs, containing bid and ask quotes accurate to four decimal places. In other words, foreign exchange traders buy or sell a currency based on the value.

Pips are used to measure a change in the exchange rate. Because most currency pairs are quoted up to four decimal places, a single pip difference is a minimal variation for these pairs. Dividing a pip by 0.0001 or10,000 by the exchange rate may determine its value.

A trader, for example, who wants to purchase the USD/CAD pair would be buying US dollars and simultaneously selling Canadian dollars. On the other hand, a trader who wishes to sell USDs would sell the USD/CAD pair to buy Canadian dollars.

Traders sometimes use the word "pips" to describe a spread between the bid and ask quotations of a currency pair, as well as the potential profit or loss from a trade.

What About Pips in Gold?

A change of 0.01 in the price of gold assets on most MT4 andMT5 brokers would be represented by a PIP in Gold, whereas for currency pairs, it's a movement of 0.0001.

The first step in calculating pips for Gold is to figure out how many pips there are. 1 pip in XAUUSD or Gold has a value of 0000.01 for 5digit traders, but it is different for 4 digit traders. What does 1 pip in Gold signify?

How to Interpret Pips When Trading XAUUSD?

1 micro lot equals $1 when trading Gold on the Meta trader platform. If you buy a 1-micro lot contract for 100 pips, it costs $1. If you buy one mini lot from 1693.00 to 1694.00, it is $10 or 100 pips. Finally, if you buy one lot between 1693.00 and 1694.00, it's worth $100 or equivalent to100 pips.

Instead of calculating the number of pips, you should inquire how many cents (dollars) XAUUSD or Gold is rising or falling when you trade the Gold. Most, if not all, traders calculate gold pips using dollars and lots in Meta trader.

What Does Pip Value Mean?

The "Pip valuation" of a given exchange position may change its value because of a one-Pip move of the relevant foreign exchange rate, all remaining equal. The currency that carries the value of a pip should be your primary currency.

This means the numerical pip value can vary depending on what primary currency you specify when you open an account. In practice, the PIP value for a forex/euro trade is generally higher as with the dollar as the base currency since the pound remains at approximately 5 percent value.

How is Pip Value Used in Trading?

Pip values give a practical sense of the risk involved and the marginal demand per pip when investing in currency pairs with similar volatility levels. The risk of the loss is not considered accurate by the bank if there is no precise calculation of the Pips of each currency.

Without this knowledge, we are likely to have too much or too little risk in trading. The pip value of positions gets multiplied using the amount of leverage used for forex operations.

Due to the generally leveraged nature of the transaction, the leveraged value gets multiplied by the amount of leverage used. By knowing the optimal size of a job, you can use money management techniques.

With money management techniques, you can improve the quality of your investment decision.

As a beginner in forex trading, knowing how much Pip Value you can use when investing in currency pairs is vital. This will guard you against entry-level problems and help you make better trades with better results.

Should You Fully Rely on Pips When Trading?

As you know, pip is a fractional value that can increase or decrease value. The pip value changes accordingly whenever the currency pair moves by 1%. Pips are greatly affected by significant currencies such as USD,GBP, and EUR movements.

In general, there are three methods of calculating pips. The first is the calculation of pip value based on percentages, the second is to calculate pip based on exchange rates, and finally, the third uses the mid-market rate.

Which Method Is Best?

Each method has its pros and cons, but in general, it will be best for you to rely on the mid-market rate. This is because the mid-market rate uses the average of buy and sell prices, therefore giving you a more accurate figure than the other methods, which only use one set of fees.

Using pips to calculate forex trading risk can be effective, but you need to know how it's done to enjoy the benefit of it entirely.

Why Trade Gold?

Gold's reputation as a haven has been well earned. But trading XAUUSD, like trading anything else, involves both opportunities and risks. The prospective return can be significant. But so is the risk, and the rewards will only come to those who manage that risk effectively.

It's not just a question of what direction gold prices might go in the short term. Instead, it's a matter of whether you can stay on course while avoiding potentially devastating losses during inevitable periods of volatility.

Gold's volatility, which tends to run higher than that of many other commodities and stocks, makes it a risky place for investors who need their money at a particular time. And while short-term traders can benefit from XAUUSD spikes in price, they have been just as successful buying and holding other investments over the long haul.

Studying the historical data and understanding how to maximize return and minimize risk can help you succeed as a gold trader.

Conclusion

Whether in trading currencies or Gold, pips are a fractional value that can increase or decrease in value based on the shift of the underlying commodity. In addition to understanding how to maximize your return and minimize your risk, it's vital to know how much you stand to gain from any given transaction.

Therefore, ensure that you utilize the information you give to get the most out of your investment. Doing so will allow you to make better trades with better results.

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