Lesson 11 – Calculate The Value Of A Pip

AdminBy AdminNov 10, 20170

In the last lesson we saw what are the pips and the definition is in the analysis of their practical returns. In this lesson we will see how important it is to calculate the pip value to account for the value of each pip for each currency cross. In fact, as we have just mentioned at the end of the tenth lesson, the value of the pip change of torque in pairs, for example in the EUR / USD is worth 10 while in the EUR / gbp worth 17. The pip value is important because on it have calculated the amount of the spread taken by the broker, you calculate the profits and losses of the trader (us), you can calculate or plan fee for stop limit / loss.

The Pips And Spread Of Broker

The Pips And Spread Of Broker

In practice, when you enter an order asking the broker to perform a service on which the broker gets his gain. In fact, the broker does not earn depending on whether we win or lose, it is completely indifferent, but gains only when we make a purchase or sale order, or when we open a position upward or downward. The actual stock exchange, however, there are transaction costs. The broker gain is calculated from the difference between bid and ask, called spreads.

For example, if the cross EUR / USD is quoted at 1,300 / 1,302, the spread is 2 pips. In practice, for each open position on that cross the broker will earn a pip value multiplied by 2. For example, if a lot of EUR / USD the pip is equal to 10 (as we have seen) the broker gain is 20 (2 x 10 pips). These 20 will be deducted immediately from the available capital.

The Pips In Computing The Profits / Losses

The Pips In Computing The Profits / Losses

In Lesson 10 we made an example of how to calculate profits according to changes in the pip value of the currency cross but failed to specify what happens with the spread.

For example, if we have a capital of 5,000, a margin of 600, a change in our favor to 4 pip we should also consider the value of the spread, therefore the account of the available capital will be given from 5000 to 600 + 40 (4 pip) – 20 ( spread) = 4.600. If we close the transaction at that time we will regain the 600 to guarantee so 5,200 of disposable capital.

The Pips To Schedule Stop Limit And Stop Loss

Know how valuable an upward or downward pip is very important to understand what you can gain or lose from an operation. For example, if we want to open a buy position on a cross because we are convinced that this will get an increase of a pip we will know who will be equivalent to 10 in the case of EUR / USD or only 8 for the usd / jpy.

If in the first case the gain is 100, in the second case with the same amount the gain is 80. A particular not trivial. So if we want to set the stop limit and stop loss we will have to remember this difference, because if we want to achieve a profit target expressed in euro (eg. I want to earn 1,000 euro), we will calculate the sum of the desired amount according to the pips of the cross on which you invest.

We invite you to lesson 12 where we will go even further on the practical aspects related to the pips.

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