So far in this series of videos, we have explained what pips are, how to read currency pairs and the different types of ‘lots’. Now we need to know how to calculate the monetary value of a pip. As a reminder, a pip is the measure of the change in the exchange rate of a currency pair and corresponds to the fourth decimal digit in pairs like the EURUSD, and the second decimal digit in Japanese Yen-based pairs. The formula for calculating how much 1 pip is worth, per 100 000 units (or 1 lot) of the base currency, is Amount of Base Currency X Pips = Amount in Quote Currency. So, for EURUSD for example, the applied formula would look like this: 1 lot (€100,000) X 0.0001 = $10. For Yen-based currency pairs, the result is a little different because the pip’s position is different. The value of 1 pip in USDJPY is 1 lot ($100,000) X 0.01 = ¥1000. Let’s look at a practical example using a trade: a trader buys 1.5 lots of GBPUSD at 1.3030. Once the price rises, for example to 1.3043, he decides to close his position. Now he’s made a profit of 13 pips. The formula in this case would look like this: 1.5 lots (£150,000) X 0.0013 = $195 of profit!
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