HOW TO CALCULATE PIP VALUE WHERE THE SECOND CURRENCY IN THE CURRENCY PAIR MATCHES THE CURRENCY OF YOUR TRADING ACCOUNT

If your trading account is in US dollars and you are trading a currency pair in which the second currency is US dollars as well then the pip values below would apply based on the account type that you have.

If your account type is a standard lot account one pip would be US$10per pip

If your account type is a mini lot account one pip would be $US1 per pip

If your account type is a micro lot account one pip would be .10 cents per pip.

For ease of calculation we will assume that you have a mini lot accounts in which the value of one pip is USS1 per pip if the second currency in the currency pair is the same as the currency as your account.

Example 1

Let’s look at some examples using your USD mini lot account. What’s the pip value for GBP/USD, NZD/USD, EUR/USD.  Your answer should be US$1 per pip as the second currency in the currency pairs matches that of your account (US dollar mini account).

Example 2

If you trading account is not in US Dollar, let say your trading account is in GBP.  What would be the pip value for the following currency pair – EUR/GBP.  The answer would be £1 per pip.  Why? Because the second currency in the currency pair matches that of the mini lot account Great British Pound (GBP).

PIP VALUE WHERE THE FIRST CURRENCY IN THE CURRENCY PAIR MATCHES THE CURRENCY OF YOUR TRADING ACCOUNT

Example 3

We are still using our US$ mini account.  What is the pip value for USD/JPY?  In this example, the second currency in the pair is not USD but the first currency is, in this situation you will have to calculate the pip value by dividing the fixed pip value amount US$1 for mini lot USD account by the rate for the USD/JPY.

Pip value = US$1 (fixed price for mini lot account)  /  rate of the currency pair

If the currency pair includes the JPY then you will have to multiply your result by 100 to get your pip value.

Let’s assume that the rate of the USD/JPY is 109.05.  The the pip value for the USD/JPY is using the formula above is-

Pip value  = US$1  /  109.05 multiply by 100

Pip value = .92 cents per pip

Example 4

Let look at another example, what’s the pip value for USD/CAD? Note the second currency in the currency pair is not USD but the first currency is, therefore you will divide the fixed price of US$1 for mini lot by the rate for the USD/CAD which is 1.2846. Your answer would be .78cents per pip (US$1/1.2846)  In this example you do not need to multiply by 100 as the currency pair does not consist of JPY.

PIP VALUE WHERE NEITHER THE FIRST NOR THE SECOND CURRENCY IN THE CURRENCY PAIR MATCHES THE CURRENCY OF YOUR TRADING ACCOUNT

Example 5

Let say, you have mini lot account is in Australian Dollar (AU$) and you would like to find the pip value for the GBP/USD?   

Please note – none of the currencies in the currency pair matches the currency of the account you are using – Australian Dollar (AU$).

First convert the second currency in the currency pair (USD) to the currency of your mini lot account AUD.  

In order to do this you will need to use the currency for the account as the first currency and maintain the USD as the second currency.   You will now have a new currency pair that is AUD/USD.

Second, find the rate for your new currency pair (AUD/USD)   Let’s assume the rate is .7500.

Finally, divide the fixed mini lot price AU$1 per pip by the new AUD/USD rate of .7500, therefore your answer would be AU$1.33 per pip (AU$1/.7500)

Example 6

Let’s look at another example using your Australian Dollar mini account.  What is the pip value for the EUR/JPY?

Please note – none of the currencies in the currency pair does not match the currency of the account.

First convert the second currency in the currency pair (JPY) to the currency of your mini lot account AUD.  

In order to do this you will need to used the currency for the account as the first currency and maintain the JPY as the second currency. You will now have a new currency pair that is AUD/JPY.

Second, find the rate for your new currency pair (AUD/JPY)   Let’s assume the rate is 82.19.

Finally, divide the fixed mini lot price AU$1 per pip by the new AUD/JPY rate of .82.19, therefore your answer would be .0122 (1AU$/82.19).   As this currency pair includes the JPY you will need to multiply your answer by 100 to get the pip value,   Therefore the pip value is AU$ 1.22 per pip (.0122*100)

Now take the plunge and do some further examples on your own for practice!!!!!

What is Position Size in Trading?

Position size is VERY, VERY, VERY important when in comes on to risk management.  Position size is also called lot size.  It is the number of position/lots you are able to trade within your risk management guidelines. Professional traders have a maximum risk of 1 or 2 % of account balance.

In order to determine the position size there is some preliminary work that needs to be done.

Assume you have the set up conditions based on your strategy, you first need to establish how much is 1% or your account balance.

Let’s assume you have a $10,000 USD mini account.  Your 1% risk in $ is US$100

 ($10,000 multiply by 1%).   

Now that you know your risk in US$ you need to establish where you will place your stop loss order (the point at which you want to get out of a trade if it goes against you). Knowing where to put your stop loss order in advance is very important for calculating your position size.

You will also need to establish your entry price. The difference between your entry price and your stop loss order is your risk in pips/points.

When you have all of these information you will be able to calculate your position size using the following formula:

Risk in Dollars   divide    by risk in pips    divide  by pip value  =  POSITION SIZE

Example 1

Let take an example, you have a US dollar account amounting to $10,000 and you only want to risk 1% of your account balance which is $100 ($10,000*1%).

You get your set up condition on the GBP/USD. You identify that you need to place your stop loss at 1.3500 and that your entry price is 1.3530. From this information you are able to calculate your risk in pips/points. In this example your risk in pips is 30(1.3530-1.3500*10,000)

You now need to establish the pip value for the GBP/USD currency pair. As the second currency in the currency pair matches that of the account you are trading then 1 pip in a mini lot account would be equal to $1 per pip.

Now that you have all three pieces of information you are now able to calculate your position size.

Position size =   Risk in dollars   divide by    risk in pip    divide by   pip value

Position size =       £100      divide by      30        divide by      1

Position size =  3.33

This means that for every 1pip movement your account will be increasing/decreasing by US$ 3.33 per pip.

The fact that you are only risking 1% of your account size means you will have 99% of your money left in your account for you to trade again if your trade goes against you.

PLEASE NOTE! BEFORE YOU PLACE A TRADE, CHECK YOU ACCOUNT BALANCE AND CALCULATE YOUR 1% RISK AS YOUR ACCOUNT BALANCE WILL KEEP ON CHANGING.   

Example 2

Let take an example, you still have your US dollar account amounting to $10,000 and you only want to risk 1% of your account balance which is $100 ($10,000*1%).

You get your set up condition on the USD/CAD. You identify that you need to place your stop loss at 1.2845 and that your entry price is 1.2870.

From this information you are able to calculate your risk in pips/points. In this example your risk in pips is 25 (1.2870-1.2845*10000).

You now need to establish the pip value for the USD/CAD currency pair. As the second currency in the currency pair does not match that of the account you are trading but the first currency does then you will have to calculate the pip value by dividing the fixed amount for mini lot I.e $1 by the USD/CAD rate of 1.2870.  This will result in a pip value of .77 cents per pip. ($1/1.2870)

Now that you have all three pieces of information you are now able to calculate your position size.

Position size =   Risk in dollars   divide by    risk in pip    divide by   pip value

Position size =       £100      divide by       25       divide by     .78

Position size =  5.13

This means that for every 1pip movement your account will be increasing/decreasing by $5.13

per pip.

Example 3

Let take an example, you still have your US dollar account amounting to $10,000 and you only want to risk 1% of your account balance which is $100 ($10,000*1%).

You get your set up condition on the USD/JPY. You identify that you need to place your stop loss at 109.00 and that your entry price is 109.70.

From this information you are able to calculate your risk in pips/points. In this example your risk in pips is 70 (109.70-109.00*100).

You now need to establish the pip value for the USD/JPY currency pair. As the second currency in the currency does not match that of the account you are trading but the first currency does then you will have to calculate the pip value by dividing the fixed amount for mini lot I.e $1 by the USD/JPY rate of 109.70 *100.  This will result in a pip value of .77cents per pip ($1/109.70*100)

Now that you have all three pieces of information you are now able to calculate your position size.

Position size =   Risk in dollars   divide by    risk in pip    divide by   pip value

Position size =       £100      divide by       70       divide by     .77

Position size =  1.86

This means that for every 1pip movement your account will be increasing/decreasing by $1.86

per pip.

Now you are ready to practice some examples on your own, so that you are able to do this quickly.   Keep referring to these examples if you have to.

Forex risk management very important. Before you can manage your forex risk you first need to know how to calculate it.

Forex risk is very easy to calculate. Let’s look at an example. Say, you have a trading account with an account balance of $100,000. Based on your forex strategy you will set a daily risk level of 2%. Therefore, your daily risk based on the example above is $2,000 ($100,000 x 2%).

Let’s expand on this example. You made a number of winning trades during the day which increase your account balance to $105,000. Your risk percentage remains the same at 2%, but the fact that your account balance has increased means that you will be able to risk some more. the next day. Therefore, your daily risk would now be $2,100 ($102,000 x 2%).

On the other hand let says you had a few losing trades which reduce your account balance to $97,000. Your risk percentage remains the same at 2%. In this example your account size has reduced, so the amount you will be able to risk will also reduced as well. As a result your daily risk will now be $1,940 ($197,000 x 2%).