Pips and Profits: Calculating Profit and Loss

It’s time for a new vocabulary word: pips. Unlike other forex vocabulary words, you’ll hear this one a lot, because it is the way we define success in foreign exchange trading.

Think of a pip as a very small unit—they’re the smallest unit in forex trading. Thus, in the GBP/USD forex pair quote value of 1.5002, the pip is the number 2. If the pair were to move to a price of 1.5006, then it would have risen by 4 pips.

The pip is the 4th number following the decimal, or the 2nd number following the decimal for other pairs.

EUR/USD – 1.4001, the 1 is the pip value.
USD/JPY – 90.01, the 1 is the pip value.

Simple enough, right?

Calculating Earnings and Losses

The primary motive for understanding pips is to calculate the profits and losses of a particular position. Follow along through the examples below, and try to calculate them on you own to maximize the lesson here.

Note: In any of the following examples, you can copy and paste the calculation into Google for confirmation.

For pairs where dollars are the base currency:

USD/JPY quoted for 91.04
Our pip calculation is .01 divided by 91.04
.01/91.04 = 0.000109841828

To find the pip value, we multiply the last answer times the dollar amount of our position. (This example assumes $10,000)
0.000109841828 * 10 000 = 1.09841828
Thus, each pip is worth $1.09.
If we buy USD/JPY for 10,000 units and it rises 100 pips, then we earn a profit of $109.

USD/CAD at 1.1050
Our pip calculation is .0001 divided by 1.1050
.0001/1.0150 = .000985221675

To find the pip value, we multiply the last answer times the dollar amount of our position. (This time, we’ll assume a purchase of $10,000 units)
.000985221675 * 10,000 = .985221675
Thus, each pip is worth $.98.
If we buy USD/CAD for 10,000 units and it rises by 50 pips, we would earn $49.

For pairs with another base currency and where we want to find the USD value:

EUR/USD quoted for 1.4550
Our pip calculation is .0001 divided by 1.4555
.0001/1.4450 = .0000692041522

To convert accurately into US Dollars (our pip calculation left us with an amount in Euros), we add an additional calculation. We need to multiply the Euro times the exchange rate.

Euro * Exchange rate
.0000692041522 * 1.4550 = 0.000100692041

So each pip in the EUR/USD pair is worth .0001 (rounded) US Dollars. If we were to purchase 10,000 units, then we’d arrive at 10,000 times the .0001 value, for a value of $1 per pip.

Whew! That’s too darn hard!

We keep a mantra at ForexOnlineLearning.com that forex can be easy. In truth, forex is easy, but these calculations are way too hard.

Do you need to know them? Not really. Brokers do all the hard work for you, and we created a pip value calculator for you that you can download to use on your own computer at any time: