May 28, 2009

How much is a pip worth ?

So how much is a pip worth, you ask?

Well, it depends on a few things: The size of the lot, the pair and the base currency in which you are trading. First, let’s look at the lot sizes. Let’s assume EURUSD here (or any pair ending in USD).:

If you enter 1 standard lot of EURUSD, each pip will be worth $10 USD. With a spread of 2 pips, you’ll be –20 pips right off the bat, then when it goes up 2 pips, assuming you went long, you’ll be BE at (Break-Even, or zero) and if it then goes up 10 more pips, you’ll be $100 USD richer (assuming you exit right away, of course).

The same trade taken with a mini-lot will end up being worth $10 USD because each pip is worth $1.

Well, then, why not take standard lots instead of mini-lots ?!?!

Here’s why. The cost of the trade, and your leverage/margin. EURUSD is currently at 1.3941. At 100:1 leverage, one mini-lot will cost your margin 1.3941 * 100 = $139.41. But one standard lot will cost you 10 times more, or $1,394.10. Let’s clear up the leverage first :

So you can see that the leverage, as well as the size of the lot, will generate vast differences on the cost of the trade. And this will in turn influence your margin. Very simply put, if you’ve got $1,000 capital, with 100:1 leverage, your margin level will be at 717% on a mini-lot. And you simply won’t be able to buy a standard lot because it’s more than your total capital. I’ll come back to leverage and margin calculations a bit later, because these need to be explained in detail in order to be clearly understood. But here are the basic calculations:

Now, we could consider 1 mini-lot with 100 leverage, then to be a reasonable trade. But what happens to your margin if things turn around? Well at –100, your margin will be at 645%, so if you put a stop loss there, you won’t be in trouble. But if you forgot to put a stop loss, and it goes to –300, then your margin will be at 502%. And at 100% you’ll be dead meat. But you’d get out before reaching that of course.

So, 1 mini-lot of EURUSD, with 100:1 leverage costs $139.41 USD. But what if you’re trading in another currency than USD. Well, you need to convert to your own currency to get your real cost. For instance, I trade in CAD. Since USDCAD is currently at 1.1138, my cost will be 139.41 * 1.1138 = $155.27 CAD. If you’re trading in EUR, your cost will be 1 / 1.3941 * 100 = € 71.73

EUR. If you’re trading in pounds, since GBPUSD is currently at 1.5934, your cost will be 1 / 1.5934 * 100 = £ 62.76 GBP.

Later I’ll upload my Excel table which automatically calculates:

- pip worth converted into your own currency

- cost of trade based on leverage

Here’s an example of various pip values:

And here’s an example of various costs based on leverage. See how the amounts are different, depending on which pairs you’re looking at:

Oh, and as I mentioned, these are real-time values because the Excel table links to your MT4 feed, so you’ll see the values change directly in the Excel sheet. I’ve got to fix a few things before but I’ll try to get it done as soon as possible. For those who want to experiment, here are the basic calculations you’ll need:

Pip worth (by hand)

(one pip, with proper decimal placement/currency exchange rate) x (Notional Amount)

Using EURUSD as an example, we have:

(.0001/1.3941) x EUR10,000 = EUR 0.71730866

If you want the pip value in USD, multiply EUR 0. 71730866 x (EURUSD exchange rate):

EUR 1.3941 x 0.71730866 = $1.00

The JPY pairs are a bit different. Pips are not the 4th decimal, like above, but rather the 2nd:

So for USDJPY:

(.01/96.88) x USD10,000 = $0.97

or 97 cents per pip

Pip worth (with Excel)

Make sure you’ve got an instance of MT4 running.

In Excel, enter this formula into a cell:

=MT4|bid!EURUSD

This will give you the current value of EURUSD. Then enter the above calculations to get the pip worth in your own currency.