How do you keep score in forex? Is it through the profits? The rate of return? The number of winning trades?

Well, it's none of that.

The scorecard for forex trading is measured in pips.

Experienced forex traders keep tally in pips because it's a more unadulterated measure of successful trades than other criteria.

As a new trader, knowing what pips are and how you can calculate pip value is critical.

By reading this article, you will learn some formulas for you to set risk through pips, calibrate your position size, and convert pips earned back to your account currency.

## Defining Pips

Percentage in point or pips begins at the fourth decimal place in a currency pair.

So, if the exchange rate for the GBP/USD an hour ago was 1.2800, and it's now at 1.2830, this means the GBP/USD increased by 30 pips (1.2830-1.2800 = 0.0030).

Conversely, if the rate for GBP/USD was 1.2800 and fell to 1.2770 after an hour, that's a 30 pip decrease (1.2770-1.2800= -0.0030).

## Calculating the Pips' Value

To appreciate the importance of pips in a trade, you need to know the value the pips represent. The calculation is simple: *just multiply one pip to the contract size then to the number of pips.*

**0.0001 x (lot size) x # of pips**

So, for the GBP/USD example, multiply 0.0001(which represents one pip) to the contract size you subscribed to, say, a mini lot, which is 10,000 units.

That's equal to $1.

After that, multiply $1 to the number of pips, which in the example is 30 pips, and that's equal to $30.

*Or, get the difference between two prices and multiply it directly to the contract size:*** 0.0030 x lot size. **

**Just keep in mind that you need to omit negative values when doing this.**

Therefore, in the two scenarios, it's either a $30 profit or a $30 loss.

## Converting Pip Value to Your Account's Currency

Now, the pip value formula above is only applicable if your trading account is in US dollars.

What if it's in Euros?

Well, to convert pip value to your account's currency, you first have to look for the exchange rate of the quote currency to the currency in which your account is denominated.

For instance, if your account is in Euros and the currency pair you wish to trade is the GBP/USD, you have to refer to the exchange rate of the EUR/USD.

Since the pips' value is in USD, the next step is to divide that to the EUR/USD exchange rate to get the value in Euros.

If the exchange rate for the EUR/USD is 1.1235, then you divide $30 to 1.1235, and that's equal to €26.70. So, instead of a $30 pip value, you get €26.70.

### Converting pip value of a cross currency pair to your account's currency

If you're trading a cross currency pair or a currency pair that doesn't include the US dollar and want to convert its pip value to USD, all you have to do is multiply the pip value to the exchange rate of the dollar pair of cross currency's base currency.**Example:** You are trading the EURGBP at £1 per pip. To get the dollar equivalent, multiply £1 to the current exchange rate of the GBP/USD.

## Japanese Yen

Among the eight major currencies, the Japanese Yen is the only currency where the pip counting starts at the second decimal place.

The reason for this is the value of the Japanese Yen relative to others is significantly lower, but the same formula for calculating pip value applies.

**(One pip (0.01) x contract size x # of pips.)**

## Setting Risk Through Pips

Most experts advise setting a 1% risk per trade, and here's how to do it.

First, multiply the 1% risk to the funds you have in your trading account.

If your account is $2000, then the answer is $20 ($2000 x 1% = $20).

Next, you have to know how many pips you'd risk losing in the set up you're eyeing on.

For example, your technical strategy permits you to lose 50 pips.

Then, you have to divide the number of pips to the dollar risk, so $20 ÷ 50 pips = 0.4.

That 0.4 is actually $0.40, which represents the pip value you should have so that when your trade does go the opposite way -- 50 pips away from the price you initiated the trade -- you'd only risk losing $20.

The last step is to select the lot size that you will use that equates to a $0.40/pip value.

To get the lot size, divide $0.40 to 0.0001, and you get 4,000 units or 4 micro lots.

That means if you trade with 4 micro lots and with a preset risk of 50 pips, your potential loss would only be 1% of your $2,000 account, which is $20.

**Remember:** If you are trading a currency pair that doesn't include your account currency, you have to convert because the example above is only for a dollar-denominated trading account.

## Quiz and Calculator

*Here's a problem for you to solve:*

*Here's a problem for you to solve:*

Your account is $5,000, and you have a trade set up that allows you to lose 50 pips, and your risk per trade is 0.5% of your account.

What lot size do you need to use, and what is the value of each pip?

*Position Size Calculator*

*Position Size Calculator*

To make it easier for you, here is an excel sheet that you can download to calculate position size. All you have to do is enter your account size, percentage of risk per trade, and the number of pips you will be risking, and it will calculate the lot size you need as well as the pip value.

## Key Takeaway

Mastering these formulas requires you to apply them in your trading continually, and it's helpful to do that on a demo account first.

Once you are exposed to these calculations on a regular basis, you will find it second nature to manipulate them in your head.

But since all of these are mostly calculated automatically on your trading platform, the one key takeaway that will come in handy at all times is position sizing because it allows you to limit trades within a specific percentage of risk.

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I Must say that you have done a great job on this article as it has All one needs to understand pip value and it would be of great help to the public as it has been of help to me….I would definitely save this article as I know it would really be of help to me next year.

Thanks a lot for this amazing instructions and explanation given about pip value.

I’m new in this online trading industry and until now I didn’t knew about this “pip” therm. The formulas you putted here are very useful, and I think that after a lot of work all of this formulas will become simpler, even if it is now complicated.

In order to implement it, as you say we need to do that on a demo account first. Can you recommend me a platform where to simulate this trading experience?

Thanks again and keep in touch.

Hi Nimrodngy,

Yes we do have a review for Forex.com and City Index. Do check them out!

This is something that I am very sure that a number of people d not know about in the past. I personally am just learning Lal about how to calculate the pip value. Actually, I am new to the trading world and so I am just learning all the words and all the terms. It’s good how you have shown the calculation and how the pros risk with this. Very nice to see

hello, i really want to first appreciate your effort in putting this great website together and writing this article. the calculation of pip value has been an issue for me ever since i started forex and converting to my currency was also an issue but a friend helped me with that. thank you for your post. now i can calculate it on my own

Awesome to know that Benny.

Feel free to download the excel sheet template so you have a handy position size calculator at your side.

Hello there,

You’ve done a great job here to explain things simply to a complete novice. Although I will have to go back( which I’ve already done ) to create a greater understanding. It’s like anything else it just takes some knowledge and a few practices to get the hang of it. I’ve always had a longing to invest in the forex market and this article has inspired me to look deeper into the opportunities it offers. Is there a secret to finding a broker though as I’m sure a good one is of the highest importance

Cheers mate Paul

Hi Paul,

Thanks for commenting.

Check out our How to select a forex broker article.