# Pip Calculator

Forex Widget: Pip Calculator

Different currency pairs have different spreads and the smallest unit of movement for a currency pair is known as the pip or percentage interest point. The pip calculator is used to determine the financial value of a pip’s movement in the forex market.

There are several things involved in determining the value of a pip for a currency. These are:

a)    The number of lots in the contract.

b)    The currency pair in question.

c)     The currency that the trader’s account is denominated in.

Many times, traders set trades using various contract sizes without knowing the financial implications of their actions. The degree of exposure to the market is not known, the risk to the account is also unknown and the trader may sometimes not be able to even tell exactly how much can be made or lost using a particular contract size if the currency moves by a certain number of pips in favour of, or against the trade. It is to curtail these problems that the pip calculator was developed.

The Pip Calculator

The pip calculator widget will have the following columns:

a)    Account currency

c)     A table displaying the various currency pairs

d)    Columns showing the financial equivalent of the calculated pip values.

e)    A button allowing the HTMP code to be generated so that the trader can add it to his website or hosting page for easy access. This may or may not be available.

How the Pip Calculator Works

The trader first chooses the currency in which the account is denominated in. This is relevant for purposes of conversion according to the exchange rate of the traded currency and the account currency.

The trader now selects the currency pair to be traded, chooses the lot size (micro, mini or standard lots), and clicks on the calculate button. The lot size is not usually expressed in lots, but rather as the size of the contract in actual financial terms. Thus a standard lot may be a \$100,000 contract, while a micro lot will be a \$1000 contract. If the trader chooses 5 mini-lots as trade size, he is required to enter \$50,000 as the trade size and not 0.5 lots in the appropriate column. Let us now show how a typical pip calculator works.

Let us assume that the account currency is in US Dollars, and the trader wants to know what the pip value for a standard lot will be for all currencies listed on his forex platform. How is this done?

Answer: Simple follow the steps listed above as described. Enter the account currency (USD), enter the financial equivalent of a standard lot trade size (\$100,000) and click the “Calculate” button. The pip value that has been calculated by the Pip Calculator for all currencies is shown below: The trader can simply repeat all the steps above to recalculate the pip value based on different trade sizes.

Uses of the Pip Calculator

The main use of the pip calculator is in knowing exactly how much is being risked into the trade and what the exposure of the account is. It is accepted as a standard in the financial markets that the maximum exposure of the trader’s open positions must not be more than 5% of the total capital in the trading account. The figures obtained from the calculation of the pip values can be used to work out the calculation of exposure so traders know if the currency pair they want to trade or the trade size they want to use is suitable for their account size.

With the information above, let us see how to work out the calculation of a trader with a \$1,000 account size.

5% of \$1000 is \$50. So the exposure must not be more than \$50, or put another way, the trader’s stop loss for an open position must not exceed \$50. So obviously, the trader cannot use standard lots because that will cause his account to be overexposed. The best option would therefore be to use mini-lots or micro-lots for the trade.

Furthermore, it can also be seen that the pip value of the EURGBP is more than that of the EURCAD. This also plays into the equation if the trader is looking to make more money from the position, or if the trader is looking to lose less money if the trade goes bad, depending on which standpoint is assumed. A trader who wins 100 pips on a EURGBP standard lot will earn \$1,596 while a trader who wins 100 pips on the EURCAD will make \$963, which is a differential earning of \$633. This differential could also be of importance if the trades end up on the losing side.

So this is how a pip calculator can be used by a forex trader. 