PIP (Price Interest Point)
Today with automatic calculators is easy to calculate the value of a pip as inserting the instrument you are trading the size and the distance between entry and stop loss will automatically calculate
the cost of PIP, which is why that particularly in neophytes trader few learn to calculate the value of a PIP.
But knowing how to calculate and increasingly important because as beginners, so we start from scratch, with the goal of becoming “almost” professional, (almost because it is obvious that the rest of us know you have to put you with commitment and discipline) and a trader professional must know how to calculate the cost of a PIP.
But what is a PIP?
PIP (Price Interest Point) is the last decimal place of a price, namely the minimum price divergence.
In all currencies we will find the prices written in this way, ES … 1.1234 the fourth digit after the decimal point is the PIP, in truth we find on the platforms also a fifth digit, which is the tenth of a PIP.
Knowing how much is a PIP is very important to know what will be our gain and our loss and then set the task with the right money management, in fact, when we want to enter the market with our strategy, we need to know the distance between the entry and the stop loss to then calculate the size and below the PIP cost.
How to calculate the cost of the PIP
The cost of the PIP is calculated using the following formula: 1 PIP x SIZE / CHANGE CURRENT:
Take for example the EUR / USD and calculate the cost of each PIP, and then we put as an example a size 0.10 lots and the current exchange rate which is 1.10090:
0.0001 × 10,000 = 1
1 / 1.1009 = 0.90 €
(Example has been used 10,000 because lots 00:10 corresponds to $ 10,000)
So once we know the cost of a pip automatically we know that with a stop loss of 50 pips we will have a risk of (50 x 0.90) = 45.00 €.
For a dollar account if we make the change at the time of writing is 1.0648, it will be 45 x 1.0648 = 47.90 dollars.
Not for all currencies a pip is the fourth digit after the decimal point, in fact there is a currency where the PIP is the second decimal place and the Japanese Yen.
So to be more practical to see the Yen as with the calculation of the individual Pip:
In fact, the formula is the same, but instead of writing write 0.0001 0.01 because, as we said, for the yen the pip is the second digit after the decimal point, so if we have the EUR-JPY exchange as An example we will calculate this: 12:01 × 100 = 10,000, 100 / 0.88 = 113.83 yen in euro (0.88 / 113.83) = € 0.0077
This is all, in a future article we will see the same calculation but with commodities and indices …