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How Much is a Pip Worth
1. Determine how much a pip is worth. Assume you are looking at a broker's quote for the currency pair euro/U.S. dollar (EUR/USD). The broker quotes 1.3490 - 1.3495. The rate 1.3490 is called the bid rate--this is the rate at which the broker buys euros and sells dollars. The rate 1.3495 is called the offer rate, as this is the rate the broker sells euro and buys dollars.
2. Measure how many 'pips' of difference are between the bid (1.3490) and the offer (1.3495). The difference in the above example is five pips. The pip is the way you measure your Forex gains and losses when trading currencies.
3. Calculate your projected profit or loss if you sell 10,000 euro at the broker's bid price of 1.3490, and then then bought the 10,000 euro back at the broker's offer price of 1.3495. In selling 10,000 euro you would receive $13,490 (10,000 x 1.3490). By buying back the 10,000 euro at 1.3495, you will give the broker $13,495 (10,000 x 1.3490). In this transaction, you would lose $5, or $1 per pip.
4. Write down a pip's value for several amounts of the euro. You know that a EUR/USD trade of 10,000 equals $1 per pip. Therefore a $1,000 trade would equal 10 cents per pip, $20,000 would equal $2 per pip, $100,000 would equal $10 per pip and $1,000,000 equals $100 per pip. To maximize your pips when trading, you need to know the value of each pip relative to the amount being traded.
5. Evaluate how to make the maximum pips. Consider the following exchange rates for the EUR/USD quoted by various brokers and assume that you have $20,000 to invest: Broker (1) 1.3490 - 1.3495, Broker (2) 1.3489 - 1.3492 Broker (3) 1.3493 - 1.3495. To make maximum pips, you will need to buy at the lowest offer rate possible and sell at the highest bid rate possible.
6. Identify the lowest offer rate, which is 1.3492, and buy 20,000 euro. Next, identify the highest bid rate. It's 1.3493, a difference of 1 pip profit or $2 if you sold the euro. However, if you believe the euro is going to appreciate, you could elect to wait and make the maximum number of pips.