Posted by forex at 12:11 AM
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U.S. Dollar as Base Currency
1. Find the current exchange rate for your currency pair; for example: USD/CAN 1.0145/1.0147. This means you can buy one Canadian dollar with 1.0145 U.S. dollars or sell one CAN for 1.0147 USD. The difference between the two quotes, referred to as the spread, is 2 pips. This is how your dealer makes money.
2. Determine your lot size. While a standard lot size is 100,000 units, it is increasingly common to trade in lots of 10,000, 1,000 or even 100. For this example, say you are trading 100,000 units.
3. Divide one pip -- 0.0001 in this case -- by the exchange rate. In the example, if you're buying CAN, this is 0.0001 divided by 1.0145, or 0.00009857. If you're selling CAN, it's 0.0001 divided by 1.0147, or 0.00009855.
4. Multiply the adjusted rate by your lot size. For buying CAN, this is 0.00009857 times 100,000, or 9.87. When selling, it's 0.00009857 times 100,000, or 9.86. This means that for your lot, every single pip change is just under 10 USD.
Other Currency as Base
5. Calculate the pip value as previously instructed. This time, however, you'll have the second currency as the base. For example: EUR/CAN 1.4560 yields a pip value of 6.87 euros.
6. Locate the exchange rate for the base currency to U.S. dollars, such as EUR/USD 1.2603.
7. Divide your original pip value by the exchange rate: 6.87 EUR divided by 1.2603 EUR per USD equals 5.45 USD per CAN in this transaction.