A pip calculator has become an increasingly popular tool for currency traders to use to measure their potential profits and losses. The pip is the smallest measure of difference in a currency pair and can be measured in terms of the underlying currency.
For example, in currency pairs including the US dollar, one pip is worth around $0.0001, also referred to as one basis point or 1/100th of one percent. The pip is priced at a standardized size to help protect investors from crippling losses when they make a losing trade. To illustrate, if the pip was valued at ten basis points rather than one, it would mean that even a single pip change would result in greater volatility in exchange rates.
To illustrate the value of the pip, let’s take as an example the GBP/USD currency pair. The direct quote for this pair is 1.6818. This means that for £1 you can buy $1.6818. However, if the pound appreciates slightly to 1.6816, then it strengthens relative to the dollar, and can now buy more greenbacks. These differences only become important when you are buying in significant amounts.
For example, for a typical currency lot of 100,000 units, £100,000 buys $168,180 at the first exchange rate. When the euro appreciates against the dollar, however, the same amount of dollars can now buy only $168,160 or $20 less.
How does a pip calculator work? All you have to do is pick the base currency and the currency pair from a drop-down menu and then type in the number of units in your position size. For currency pairs in which the USD is not the base currency, you may also have to type in the ask price in order to determine the value of the pip.
To illustrate, let’s say you want to determine the value of one pip in the USD/JPY currency pair. If the account currency is the US dollar and the ask price is 77.84, with a lot size of 100,000 the pip is worth 12.85 On the other hand, if the account currency is the yen, the value of the pip is 1,000 and you don’t need to provide the ask price.
Knowing the value of a single pip is important for a number of reasons. One, it enables you to determine how much you are paying in spreads to your forex broker and how it affects your profits. It also enables them to determine how much they could lose in a trade based on exchange rate differences multiplied by the lot size, allowing traders to gauge if the risk is worth it for them. A pip calculator is a common widget that can be found in virtually any forex broker site and is usually a free to use online tool.
While many traders may dismiss the use of a pip calculator as not being strictly necessary to their trading activities, smarter ones would realize that any tool that provides them with more information is a valuable one that can help them become better traders.