Know Your Profit and Loss

Here is where we’re going to do a little math. You've probably heard of the terms "pips" and "lots" thrown around, and here we're going to explain what they are and show you how they are calculated.

Take your time with this information, as it is required knowledge for all Forex traders. Don’t even think about trading until you are comfortable with pip values and calculating profit and loss.

What the heck is a Pip?

The most common increment of currencies is the Pip. If the EUR/USD moves from 1.2250 to 1.2251, that is ONE PIP. A pip is the last decimal place of a quotation. The Pip is how you measure your profit or loss.

As each currency has its own value, it is necessary to calculate the value of a pip for that particular currency. In currencies where the US Dollar is quoted first, the calculation would be as follows.

Let’s take USD/JPY rate at 119.80 (notice this currency pair only goes to two decimal places, most of the other currencies have four decimal places)

In the case of USD/JPY, 1 pip would be .01

Therefore,

USD/JPY:

119.80
.01 divided by exchange rate = pip value
.01 / 119.80 = 0.0000834

This looks like a very long number but later we will discuss lot size.

USD/CHF:

1.5250
.0001 divided by exchange rate = pip value
.0001 / 1.5250 = 0.0000655

USD/CAD:

1.4890
.0001 divided by exchange rate = pip value
.0001 / 1.4890 = 0.00006715

In the case where the US Dollar is not quoted first and we want to get the US Dollar value, we have to add one more step.

EUR/USD:

1.2200

.0001 divided by exchange rate = pip value
so
.0001 / 1.2200 = EUR 0.00008196

but we need to get back to US dollars so we add another calculation which is

EUR x Exchange rate
So
0.00008196 x 1.2200 = 0.00009999

When rounded up it would be 0.0001

GBP/USD:

1.7975

.0001 divided by exchange rate = pip value
So

.0001 / 1.7975 = GBP 0.0000556

But we need to get back to US dollars so we add another calculation which is

GBP x Exchange rate

So
0.0000556 x 1.7975 = 0.0000998

When rounded up it would be 0.0001

You’re probably rolling your eyes back and thinking do I really need to work all this out and the answer is NO. Nearly all forex brokers will work all this out for you automatically. It’s always good for you to know how they work it out.

In the next section, we will discuss how these seemingly insignificant amounts can add up.