The popularity of forex trading has been skyrocketing in the past few years. Thanks to all the advanced trading platforms and automated tools that made the forex market easier for ordinary people like us to access and navigate. But getting enough education is a must before becoming an independent forex trader. ‘Pip’ is one of the first forex terms you learn about while entering the forex market. The concept of pip is very basic, but it is an essential and inseparable part of the trading process. Pip calculations may look simple for some traders, but most beginners find it confusing or time-consuming. A forex pip calculator is a powerful tool that can save us from the complexity of pip calculations.
In this article, you will learn about the concepts of pips in a comprehensive manner, along with the relevance of a pip calculator in forex trading. So, let’s get started without any delay.
Basics of Pip – what is it?
Pip is actually a popular abbreviation for the term ‘Price Interest Point’, also known as ‘Percentage in Point’. In simple words, pips are used as a measurement unit to track and state the current price fluctuations. As you may already know, the asset class in the forex market are international currency pairs, which represent the exchange rate between 2 currencies. The deviation in value of one currency against another is what you trade for in the forex market. Different currencies have different values; again, there will be a difference when traders use different base currencies for their accounts.
Thus, having a universal and standardised unit of measurement was the need of the hour. The concept of pips was a perfect solution as it quickly became a global measurement unit for all currency trading activities. In all currency pairs except the Japanese Yen pair, the pip is measured in the 4th decimal place, while for the later one pip is measured in the 2nd decimal place. Decimals are there to measure the most minor price movements that happen in the forex market. For instance, one pip for the EUR/USD pair is 0.0001, and the same for the USD/JPY pair is 0.01. Understanding this difference is your first lesson to learn about pips.
Basics of Pip calculations
There are different methods that are followed for pip calculations, but let’s stick to a simple and popular formula that is being used by the majority of forex traders.
Pip value = (Pip/ current market price) * trade size in lots
One exciting thing about pip value is that it remains the same for currencies. While trading with USD as quoted currency and standard lot size (1,00,000 currency units), one pip will be equal to $10, while trading with the mini lot (10,000 currency units) is $1. Each pip is equal to $0.1 when you trade in micro-lots (1000 currency units), which is ideal for a small trading account. This means that the preferred lot size or position size and the currency being traded are very important in pip calculations. You can make use of various trading tools to understand and learn about lot size calculations or any other trade-related metrics.
Differences between Pip and Pipette
A common mistake that many traders make while applying the concept of pips is confusing it with the pipette. Many of us even use these terms interchangeably without understanding the difference between the two. We need to clear up this confusion before moving forward.
Generally, pip is the smallest unit of measurement in the forex world. But the pipette is even smaller. It is often referred to as a fractional pip. 1 pip is equal to 10 pipettes, or in other words, 1 pipette is 1/10th of a pip. In the case of Japanese Yen pairs, a pipette is measured at the 3rd decimal place; for all other pairs, it comes at the 5th decimal place. So, we can say 1 pipette is 0.00001 for EUR/USD and 0.001 for USD/JPY.
The concept of pips became much more precise with the pipette application. Sometimes, the price fluctuations are very difficult to measure in pips, but they are still significant to the trader. Hence, understanding fractional pips or pipettes makes the calculation process easier. This also allows us to pay attention to the details and make better trading decisions. These days, most forex pip calculators also take Pipette into account to provide precise results to traders. But why is a forex pip calculator so relevant for traders? For that, you need to read the next section.
Facts about Forex Pip calculator
As you can guess from the name, a forex pip calculator is a tool designed to perform pip calculations on behalf of traders. You can find this tool on popular trading platforms and forex broker websites, as they provide a free online pip calculator as a part of their toolkit for platform users. The pip calculator is fully automated and calculates pip values using an algorithm. Using a pip calculator is very easy and convenient for anyone. You just need to know about the basic forex terms and enter the required details into the calculator.
Let’s briefly look at the terms you need to know before using the pip calculator.
- Instrument – You need to choose the trading instrument for which you want to carry out pip calculations. While trading forex, it will be currency pairs.
- Lot type – As you may already know, most brokers allow you to trade with 3 different types of lots: standard, mini and micro. You just need to choose the one you want.
- Lots – This is the number of lots for your position, also referred to as trade size or position size. Your lot size actually determines your risk per trade, and you need to pay a lot of attention to this to manage the risk.
- Base currency – All traders get to choose a base currency for funding their account. This base currency needs to be specified here. It is the currency in which your funding/ withdrawals happen.
- Pips – Lastly, you need to choose the number of pips for which you want to calculate the monetary value of the pip.
Once you correctly enter all these details, you can click the calculate button and get the results quickly. It will be shown in your own account’s base currency, making it easier to comprehend. The current conversion rate will be applied to the results to provide precise results in real time. Talking about currency conversions, another helpful tool that you can add to your toolkit is a Forex currency calculator. This essential and straightforward tool converts one currency to another instantly. This tool also applies real-time exchange rates to provide precise results.
A pip calculator has many benefits as it is a crucial metric in all trade-related calculations. Pip measures price movements, sets profit targets, and determines risk/reward ratios. Traders often calculate their potential profits as the number of pips that can be gained. Pips can also be used as a metric for precisely placing Stop Loss and Take Profit orders.
Top 3 Tips for using a pip calculator with perfection
- Find a reliable platform for using pip calculators – As I mentioned, you can see many online pip calculators, which can be found for free on almost every other trading platform. However, finding one that is reliable is essential for getting error-free results. You need to check if the calculator is fast enough. The purpose of using a pip calculator is to achieve superior speed and accuracy, which is impossible to achieve in manual calculations.
- Double-check the details you enter – Pip calculators areefficient and always provide accurate results. But they are just automated tools; the calculation can go wrong if you make any mistake while entering the details. Hence, you should double-check the details before hitting the calculate button. So make sure all metrics, such as currency pair chosen and lot size account base currency, are correctly entered. Also, pay attention to the decimal places while trading with JPY pairs.
- Consider spreads – One thing that many traders forget about while using a pip calculator is the spreads. When you place a trade, you should also consider spreads, a key component of trading costs. Spreads are the difference between bid and ask prices, which is stated in pips.
Should You Use A Pip Calculator?
Without a doubt, yes! A pip calculator is an indispensable forex tool that simplifies the complex pip calculation process. Finding a user-friendly, fast and reliable pip calculator is essential to get accurate results. You should also double-check the values entered and consider spreads to make an informed trading decision.