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1. Determine how much a pip is in terms of one currency against another. For the four major currency pairs, one pip equals 1/10,000th of the exchange rate. For example, if one euro costs 1.3205 U.S. dollars, then the exchange rate consists of 13,205 pips. In other words, if it rises by 40 pips, the exchange rate will be 1.3205 plus 40, equaling 1.3245. For the Japanese yen, the pip is 1/100th of the exchange rate.
2. Define how much a pip is worth in terms of the basic currency. This value can also be referred to as pip value. The formula is as follows:Pip Value = (0.0001 / exchange rate) x size of the lotFor example, if the lot is 100,000 units of currency, and the exchange rate is 1.3205, then the value of one pip is as follows:Pip Value = (0.0001 / 1.3205) x 100,000 = $7.57
3. Watch large swings in the exchange rate. Currency day traders typically pay attention only to the last two digits of the exchange rates, i.e., the two-digit pips. However, if the exchange rate moves quickly by more than 100 pips, it is possible to make mistakes if not looking at the whole exchange rate rather than just the last two digits.