Calculating a FOREX Pip Value

A forex pip is the smallest unit of movement that a currency pair can make on the currency market. It's usually .0001 or .01 percent of the total value of the currency pair. Currencies are traded on the foreign currency exchanges in the form of currency pairs expressed in terms of the traded base currency (currency being purchased) divided by the quote currency (the currency used to buy the base currency). 

For example, imagine that on November 14, the EUR/USD (the euro and US dollar exchange) closed at 1.3520, and on November 18, it closed at 1.3522.  The difference between the two values shows that the price of the EUR/USD increased by 2 pips (1.3522 - 1.3520 = .0002). The value of one pip would be expressed in terms of the quote currency and the order quantity that was purchased. A typical lot size for currencies is 100,000. If 100,000 euros were purchased on November 14 in USD, the order would be worth $135,200. When the price rose to 1.3522, the change of 2 pips would be worth $20 (135,220 - 135,200). One pip in this example would be worth $10 ($20/2 = $10).

When the USD is used as the base currency, the opposite relationship exists. For example, when the price of the USD/EUR equals .7225 and then rises to .7226, a price change of 1 pip is incurred. This would equal (.7726 - .7225) x 100,000 x .7226 = .7226 = USD $.7226.

When two different currencies are used, some other value would be formed in terms of the quote currency that is used.


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