How to determine the value of a PIPs in forex buy and sell trades

Each industry has a vocabulary, and forex trading is no different. Currency trading used to be exclusively done among banks and major corporations only, until recently when the average investor could participate via forex brokers in trading currencies. You most likely have heard or will hear that a major currency pair such as EUR/USD has moved by 100 pips in a day. But what is a pip, and what is the value of a pip for given size in your forex buy and sell trades ?

A pip is one "Percent of Interest Point". In hopefully easier language, it is 1/100th of one percent (in other words one percent of one percent, which is 1/10000th) of a given amount. Since one percent of $100 is $1, then one PIP of an amout of $100 is $0.01 (one cent). Notice that one PIP of $10000 is $1, and that one PIP of $1 is 0.0001. (also notice that 1 appears on the 4th decimal in the value of a PIP for $1)

Suppose that you bought 10000 units of EUR/USD. If EUR/USD were 1.5000, then this means you bought 10000 euros, and paid for that purchase(1.5*10000)USD, which USD15000. If EUR/USD were to move to 1.5001 (which is (1.5000+0.0001)), then your EUR holdings are now valued in dollars at $15001 (which is 1.5001 times 10000 units of EUR). If you were to sell them then your profit in dollars will be $1, for the size you bought. If you want to calculate your profits in EUR, when EUR/USD is 1.5001, then it would be (1/1.5001) EUR. In this example we say that EUR/USD has increased by 1 PIP. If you bought 50000 EUR/USD instead of 100000 EUR/USd, your position would have made $5, or (5/1.5001) EUR. Also note that $5 is 1/100th of one percent of 50000, because one percent of 5000 is 500, and 1/100th of the latter is 5. In general one PIP of EUR/USD is valued (in USD) at: (0.001*Size) where size is the number of units of your EUR/USD buy and sell trades.

The value of a PIP the depends on three things: the size of your position, the currency you want to value it at, and (in certain cases) the conversion rate. For instance in case of EUR/USD, one PIP in USD is (0.001*Size) in USD dollar, but if we want to value it in EUR, one has to divide the value of the PIP of USD by the conversion rate of EUR/USD. For instance of EUR/USD were to move from 1.5000 to 1.5100 (which is one 100 PIPS) and you were to determine how much you have made in EUR as profit for each 10000 units of EUR/USD you bought, then it would be: 100*(0.0001)*(10000)/1.5100, which is $100 divided by 1.51 to obtained the amount in EUR. Notice that your profit is the same in USD for a give size and amount of PIPS, but it will change (decrease) if you were to measure it in EUR as when EUR/USD rises, as the conversion rate back to EUR is rising.