In Forex Trading, all the profits and losses are measured in pips, which is anÂ acronym for Percentage In Point. Therefore the more pips we collect, the better our profits will be. But then, how can we convert the pips into dollars and cents?
It will be based on the following formula:-
Value of 1 pip = minimum unit of movement*Amount Traded / Exchange Rate
minimum unit of movement symbolises a 0.0001 in four-decimal-based currency pairs (for most pairs except JPY pairs) and a 0.01 in two-decimal-based currency pairs (for all the JPY pairs);
amount traded refers to 1 lot which is 100,000 units of the base currency traded;
exchange rate will be the rate at that moment of time for the currency pairs.
a. USD/CHF, Â 1 standard lot (100,000 units), exchange rate is 1.1718, using the formula:
Value of 1 pip = 0.0001*USD100,000/1.1718 = USD8.53
b. USD/JPY, 1 standard lot (100,000 units), exchange rate is 92.29, using the formula:
Value of 1 pip=0.01*USD100,000/92.29=USD10.84
c. EUR/USD, 1 standard lot(100,000 units), exchange rate is 1.2658, using the formula:
Value of 1 pip=0.0001*EUR100,000/1.2658=EUR7.90
Converted to USD, Value of 1 pip = USD(7.90*1.2658) = USD10
This explains why those currency pairs with USD as the quote currency will be valued at a fixed USD10 per standard lot.
What about for those cross-rate currency pair?
For example, EUR/JPY, exchange rate is 158.44, 1 standard lot
Value of 1 pip = 0.01*EUR100000/158.44=EUR6.31
To convert to USD, we will need to use EUR/USD exchange rate at that time, says 1.6693, I can change 1EUR to USD1.6693
Value of 1 pip = USD(6.31*1.6693)=USD10.53
Another example, EUR/GBP, 1 standard lot, exchange rate is 0.8081
Value of 1 pip = 0.0001*EUR100,000/0.8081=EUR12.37
To change to USD, we will need to have the exchange rate for EUR/USD at that point of time, says 1.6684,meaning I can change 1EUR for USD1.6684
Value of 1 pip in USD= USD(12.37*1.6684)=USD20.64
If I long 0.2 lot of USD/JPY at 90.03 and subsequently, the price goes up to 91.03, what will be my profit then?
Value of 1 pip = 0.01*100,000/90.03=USD11.11
Profit = (9103-9003)*USD11.11*0.2lot=USD222.2
If I long 2 lots of USD/JPY at 90.03 and subsequently, the price goes down to 89.03, what will be my loss then?
Value of 1 pip = 0.01*USD100,000/90.03=USD11.11
Losses in value = (9003-8903)*USD11.11*2=USD2221
Therefore, we can conclude that
Profit / (Loss) = (Total Pips Earned or Total Pips Loss) *(value of 1 pip) *(total nos of lots)
Last but not least, you need not worry on what is your total profit and loss when you close your trade. This is because, the broker system will help you to calculate the profit and loss for you automatically.