Unlike stocks and investments in other markets, currency prices in the foreign exchange, or forex, market move in tiny increments called pips. To figure your profit or loss on a trade, you need to know how many pips you gained or lost and the dollar value of each pip. Currencies trade against one another in pairs and are typically quoted to four decimal places. The fourth decimal place represents one pip. At first glance, a one-pip move of 0.0001 in an exchange rate seems minuscule, but on larger trade sizes these pips can add up to noticeable profits and losses.
Step 1
Log in to your forex trading account and look up the opening price, closing price and the number of units of currency of one of your trades. You can typically find this in the "Account History" section. As an example, assume you bought 10,000 euros versus the U.S. dollar for 1.3205 and closed the trade for 1.3258.
Step 2
Subtract the opening price from the closing price to determine the positive or negative price change. In this example, subtract 1.3205 from 1.3258 to get a positive price change of 0.0053.
Step 3
Multiply your result by 10,000 to determine the number of pips you gained or lost. If you initially bought the first currency in the pair, a positive result indicates a gain, while a negative one is a loss. Conversely, if you initially sold the currency, a negative number represents a gain. In this example, multiply 0.0053 by 10,000 to get a profit of 53 pips.
Step 4
Divide 0.0001 by your trade’s closing price. In this example, divide 0.0001 by 1.3258 to get 0.00007543.
Step 5
Multiply your result by the number of units you traded to calculate the value of each pip in terms of the first currency in the pair. In this example, multiply 0.00007543 by 10,000 to get 0.7543 euros per pip.
Step 6
Multiply your result by your trade’s closing price to figure the value of each pip in U.S. dollars. Do this only if the U.S. dollar is the second currency in the pair. If the U.S. dollar is the first currency -- such as in the U.S. dollar versus the Swiss franc -- skip this step. In this example, multiply 0.7543 by 1.3258 to get $1 per pip. This means you make $1 for each 0.0001 increase in the exchange rate and lose a buck for each 0.0001 decrease.
Step 7
Multiply each pip’s dollar value by the number of pips you gained or lost to figure your total profit or loss. Concluding the example, multiply $1 by 53 to get a $53 profit.
References
Tips
- Unlike other currencies, the Japanese yen is quoted to two decimal places; one pip is 0.01. If you trade the U.S. dollar versus the yen, substitute 100 for 10,000 in Step 3 and 0.01 for 0.0001 in Step 4. For example, if you bought the U.S. dollar versus the yen for 88.25 and closed your trade for 88.33, you made 8 pips.
- Some brokers quote currencies to five decimal places and quote the yen to three. These last decimal places are fractional pips, or “pipettes.”