PIP
& PROFIT/LOSS CALCULATION
Understanding
how to calculate pip value and profit/loss requires
a basic knowledge of currency pairs and crosses.
| Direct
Rates |
GBP/USD,
EUR/USD, AUD/USD, NZD/USD |
| Indirect
Rates |
USD/JPY,
USD/CHF, USD/CAD |
| Cross
Rates |
GBP/JPY,
EUR/JPY, AUD/JPY, EUR/GBP, GBP/CHF |
(Where the US Dollar is not involved)
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DIRECT
RATES
Currency pairs where the USD is the quote currency are
referred to as direct rates. This holds true for such
currencies as the EUR,GBP, NZD and the AUD.
Calculating
direct Rate Pip Value
Pip stands for "price interest point" and refers
to the smallest incremental price move of a currency. Tick
size is the smallest possible change in price. Pip value for
direct rates are calculated according to the following formula:
Formula: Pip = lot size x tick size
Example for 100,000 GBP/USD contract:
1 pip = 100,000 (lot size) x .0001 (tick size) = $10.00 USD
Calculating
Direct Rate P/L (Profit/Loss)
Calculating P/L for direct rates is calculated as follows:
Formula: Selling price - Purchase price = P/L
Example
for 200,000 GBP/USD contract initially bought at 1.7505 then
sold (closed) at 1.7540:
1.7540 (selling price) - 1.7505 (purchase price) = .0035 positive
pip difference = 35 pip profit
To
further convert the above P/L to USD, use the following calculation:
Formula: Pip profit (loss) x lot size x tick size
= USD profit (loss)
35 (pip profit) x 200,000 (lot size) x .0001 (tick size) =
USD $700 profit
INDIRECT RATES
Most currencies are traded indirectly against the U.S. Dollar
(USD), and these pairs are referred to as indirect rates.
An example is the USD/CAD (Canadian Dollar). The USD is the
"base currency," the CAD is the "quote currency"
and the rate quote is expressed as units per USD. An example
of a indirect rate is as follows: USD/CAD trading at 1.1500
means that 1 USD = 1.1500 CAD.
Calculating Indirect Rate Pip Value
Pip stands for "price interest point" and refers
to the smallest incremental price move of a currency. Tick
size is the smallest possible change in price. Pip value for
indirect rates are calculated according to the following formula:
Formula: pip = lot size x tick size / current
rate
Example for 100,000 USD/JPY contract currently trading at
120.50:
1 pip = 100,000 (lot size) x .01 (tick size) / 120.50 (current
rate) = USD $8.30
Calculating Indirect Rate P/L (Profit/Loss)
Calculating P/L for indirect rates is calculated as follows:
Formula Selling price - Purchase price = P/L
Example for 100,000 USD/JPY contract initially bought at 120.50
then sold (closed) at 120.30:
120.30 (selling price) - 120.50 (purchase price) = -.20 negative
pip difference = 20 pip loss
To further convert the above P/L to USD, use the above "Calculating
Indirect Rate Pip Value" as follows:
1 pip = 100,000 (lot size) x .01 (tick size) / 120.30 (current
rate) = USD $8.31
Therefore: USD $8.31 (pip value) x 20 (pip loss) = USD $166.20
loss
CROSS
RATES
Currency pairs that do not involve the USD are referred to
as cross rates. Even though the USD is not represented in
the quote, the USD rate is usually used in the quote calculation.
An example of a cross rate is the EUR/GBP. Again, the EUR
is the base currency and the GBP is the quote currency.
Calculating
Cross Rate Pip Value
Pip stands for "price interest point" and refers
to the smallest incremental price move of a currency. Tick
size is the smallest possible change in price. The base quote
is the current base pair quote. Pip value for cross rates
are calculated according to the following formula:
Formula Pip = lot size x tick size x base quote
/ current rate
Example for 100,000 EUR/GBP contract currently trading at
.6750, and EUR/USD currently trading at 1.1840:
1 pip = 100,000 (lot size) x .0001 (tick size) x 1.1840 (EUR/USD
base quote) / .6750 (current rate) = USD $17.54
Calculating
Cross Rate P/L (Profit/Loss)
Calculating P/L for cross rates is calculated as follows:
Formula Selling price - Purchase price = P/L
Example for 100,000 EUR/GBP contract initially sold at .6760
then bought (closed) at .6750:
.6760 (selling price) - .6750 (purchase price) = .0010 positive
pip difference = 10 pip profit
To further convert the above P/L to USD, use the above "Calculating
Cross Rate Pip Value" as follows:
1 pip = 100,000 (lot size) x .0001 (tick size) x 1.1840 (EUR/USD
base quote) / .6750 (current rate) = USD $17.54
Therefore: USD $17.54 (pip value) x 10 (pip profit) = USD
$170.54 profit
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