# Pips, lots and a little bit of math

If you’ve had any experience in the foreign currency market or the forex market, I am sure you would have heard of the term pip. If however you are new to the forex market the term pip will probably have you thinking of those little seeds found in fruit. In terms of forex a pip is the smallest increment a currency can move, it is usually the fourth decimal place in a quoted price. If for example, the Australian dollar moves from \$0.8342 to \$0.8343 we can say the Australian dollar has increased in value by one pip. If the Australian dollar moves from \$0.8342 to \$0.8242 we can say the Australian dollar has decreased in value by one hundred pips.

Now that we all know what a pip is, what is a pip worth? There is good and bad news here. The good news is the software program you use as a trading platform will usually calculate this for you. The bad news is, I think it is a requirement that you understand how to do this manually. Before we get onto this calculation, we need to know a few things first. In forex, the standard unit size of a transaction is referred to as a lot. In general, there are three lot sizes offered by forex dealers or brokers.

### Standard lot

A standard lot is usually equal to 100,000 units of the base currency.

### Mini lot

A mini lot is usually equal to 10,000 units of the base currency.

### Micro lot

A Micro lot is usually equal 1000 units of the base currency.

Returning to the discussion about pip value. Pip value can be fixed or variable dependent on the base currency of your account and also the currency pair in which you are trading. It is also very dependent upon the size of the lot that you trade.

First, we will look at the pip calculation for an indirect currency. The currency, we will use is the AUD/USD. Most of the time calculating the pip value will be a three-step process, using AUD/USD 0.8232 as an example.

Step one

The first step is to divide one pip by the current price.

`Current price = 0.8232Pip = \$AUD 0.0001Pip / Current price0.0001 / 0.8232 = \$AUD 0.00012148`

Step two

The next step is to convert to the currency in which our account is based. In this example our account is based in US dollars.

`Current price = 0.82320.00012148 * 0.8232 = \$USD 0.0001`

Step three

The final step, we multiply the previous result by the lot size to determine the profit or loss from one pip.

`For a standard lot =>0.0001 * 100,000 = \$10 per pip.For a mini lot => 0.0001 * 10,000 =\$1 per pip.For a Micro lot =>0.0001 * 1000 = \$0 .10 per pip.`

Now, we look at the pip calculation for a direct currency. The currency we use is the USD/JPY. We apply the three-step process to this new currency pair. We will use USD/JPY 115.69 as an example.

Step one

The first step is to divide one pip by the current price. Notice with this example, one pip is equal to 0.01. As already discussed a pip is the smallest increment in which a currency can move.

`Current price = 115.69 Pip = 0.01Pip / Current price0.01 / 115.69 = \$USD 0.00008644`

Step two

The next step is to convert to the currency in which our account is based. In this example the account is based in US dollars therefore no conversion is necessary.

Step three

The final step, we multiply the previous result by the lot size to determine the profit or loss from one pip.

`For a standard lot => 0.01 * 100,000 = \$8.644For a mini lot => 0.01 * 10,000 = \$0.8644 For a Micro lot => 0.01 * 1000 = \$0.08644`

If you have your account balance in US dollars general rule of thumb emerges. For indirectly quoted currencies like AUD/USD, EUR/USD and GBP/USD the pip value for a standard lot will always be \$10.

To recap, calculation of the pip value is usually a three-step process with step one determining the value of a pip and then dividing one pip by the current price, step two is to convert to the currency in which your account is held and the final step is to multiply by lot size. You should practice this for yourself. A couple of times just to get the hang of it.