It is essential to all investors what the value of each PIP is in their respective trades, it will help to understand how much PROFIT/LOSS will be made with each point (tick) movement. It will also help to define where to place Stop Losses and Take Profits within their investments.
You must understand currency quoting conventions and the difference between the BASE and the QUOTE currency.
There are many free software’s out there that can automatically calculate PIP values for you, if you don’t want to do the math.
In the spot Forex market (but not localized futures markets) the quoting
|BASE Currency||QUOTE Currency|
Some general rules.
EUR is always base
GBP is always base except EUR/GBP
Old colonial currencies such as AUD/NZD Always base except EUR/GBP
USD always base except EUR/GBP/ and Old colonial currencies
To express the value in the terms currency multiply 1 pip with the lot value:
EUR/USD pip = 0.0001 X 100,000 = $10.00
EUR/USD pip = 0.0001 X 10,000 = $1.00
USD/CHF pip = 0.0001 X 100,000 = CHFr 10.00
USD/CHF pip = 0.0001 X 10,000 = CHFr 1.00
To convert to the base currency simply divide by exchange rate:
Say EUR/USD exchange rate = 1.4750 = $10.00 / 1.4750 = EUR 6.78
Say USD/CHF exchange rate = 1.1015 = $10.00 / 1.1015 = $9.08
JPY works on exactly the same principle however is only 2 decimal places.
All currency quotes are provided in pairs, and each pair can be expressed as a decimal fraction. For example, if a Great Britain pound (GBP) is worth 1.98244 USD, then this can be expressed as the fraction 1.98244 USD/1 GBP. We also see from the above table that a Euro is worth 0.68211 GBP, which can be expressed as 0.68211 GBP/1 EUR.
From these 2 fractions, we can calculate what the USD is worth in EUR.
|EUR/USD =||1.98244 USD||X||0.68211 GBP||= 1.3522421|
|1 GBP||1 EUR|
GBP cancels out, resulting in a quote for dollars per Euro. As you can see, this is very close to the actual quote, 1.35225, from the table above. Because we are ignoring the bid/ask spread and transaction costs to simplify the math in this example, there is no reason to believe that it would be exact. It is also true that arbitrage is not a perfect equalizer because the market is not perfectly efficient.
But what if these cross rates didn’t equalize. Suppose, for instance, that 1 GBP was exactly equal to 2 USD, with all other cross rates remaining the same. Obviously, the above equation would not hold, but it would present an arbitrage opportunity in the FX spot market, as illustrated below:
If EUR/USD bid and offer is at 1.4700 1.4710
and GBP/USD bid and offer is at 1.9580 1.9590
You would need the USD/GBP which is the reciprocal of the GBP/USD
so 1/1.9580 = 0.5107 x 1.47 = 0.7507
You can then work out the other.
Basically you need to go long EUR/USD (long EUR, Short USD)
& short GBP/USD (Short GBP, Long USD)
or vice versa.
Therefore cancelling out the USD.
Formula Pip = lot size x tick size x base quote / current rate
Example for 100,000 EUR/GBP contract currently trading at .6750, and EUR/USD currently trading at 1.1840:
1 pip = 100,000 (lot size) x .0001 (tick size) x 1.1840 (EUR/USD base quote) / 0.6750 (current rate) = USD $17.54
Calculating Cross Rate P/L (Profit/Loss)
Calculating P/L for cross rates is calculated as follows:
Formula Selling price – Purchase price = P/L
Example for 100,000 EUR/GBP contract initially sold at 0.6760 then bought (closed) at 0.6750:
0.6760 (selling price) -0.6750 (purchase price) =0.0010 positive pip difference = 10 pip profit
To further convert the above P/L to USD, use the above “Calculating Cross Rate Pip Value” as follows:
1 pip = 100,000 (lot size) x .0001 (PIP size) x 1.1840 (EUR/USD base quote) / 0.6750 (current rate) = USD $17.54
Therefore: USD $17.54 (pip value) x 10 (pip profit) = USD $170.54 profit
More on crosses click here