How is the point value of foreign exchange calculated?

Forex pip value is an important concept in foreign exchange trading. It represents the smallest unit of change in the price of foreign exchange. In foreign exchange trading, the price of a currency pair is usually expressed as four or five decimal places, such as 1.1234 or 1.12345. These decimal points are the foreign exchange pip value.

The size of the Forex pip value depends on different currency pairs. For most major currency pairs such as EUR/USD, GBP/USD and USD/JPY, the Forex pip value is usually 0.0001. However, for some currency pairs such as JPY/USD, the Forex pip value may be 0.01. In trading, changes in the Forex pip value will directly affect the trader's profit and loss.

Let's explain in detail what the point value of foreign exchange is.

When communicating with traders, you will hear the other party say that USDJPY has risen by 10 points and EURUSD has fallen by 20 points. Please don't misunderstand, this does not mean that it has risen by 10% and fallen by 20%. This point does not mean percentage points, because you will also hear that it has fallen by 300 points...

This "point" is called "pips" in English and is a unit of foreign exchange valuation.

In earlier foreign exchange trading systems, the quotes we saw were roughly in the form of:

USDJPY：102.75

EURUSD：1.3433

GBPUSD：1.6432

The smallest unit of measure is a point.

For example, a point on USDJPY is 0.01, a point on EURUSD is 0.0001, and a point on GBPUSD is also 0.0001. This is collectively referred to as the 4-digit quotation system, and basically no traders use this system anymore.

Later, the trader felt that the quotation was too "crude" and should have been able to quote more delicately in the hope of using leverage to generate more trading opportunities on a smaller volatility. Therefore, a 5-digit quotation system was created, and the above quotation appears to have become this form:

USDJPY：105.733

EURUSD：1.11865

GBPUSD：1.27998

A point for USDJPY is 0.001, a point for EURUSD is 0.00001, and a point for GBPUSD is also 0.00001.

Due to the fact that the two systems emerged one after the other, and a large number of foreign exchange traders transitioned from the old quotation system, in order to distinguish between the two systems, we will call a point of the 4-digit quotation system a "large point", and a point of the 5-digit quotation system a "small point".

For those who are too lazy to calculate, it is possible to roughly remember the "experience value" of a calculation, that is, if you buy a 1-lot straight currency pair (such as EURUSD or USDJPY), you will make a profit of about $1,000 when you rise 100 points. Conversely, if you sell short a 1-lot straight currency pair, you will make a profit of about $1,000 when you fall 100 points. Of course, if the direction is reversed, you will lose $1,000. How to calculate it? Let me use 3 sets of examples to illustrate the relationship between the point value of the dollar in the front straight, the dollar in the back straight, and the cross.

Time 1:

USDJPY：103.793

GBPUSD：1.32780

GBPJPY：137.816

Time 2:

USDJPY：104.793

GBPUSD：1.33780

GBPJPY：140.192

Note that during this process, USDJPY rose by 100 points, GBPUSD rose by 100 points, and GBPJPY rose by 237.6 points.

For USDJPY:

At time 1, I bought 1 lot ($100,000) of USDJPY, which is equivalent to exchanging 10379300 yen for $100,000.

At time 2, the contract for the first lot of USDJPY had risen to the price of 1,0479,300 yen. I sold it and made a profit of 100,000 yen. At this time, I exchanged 100,000 yen back to the US dollar and got $954.2622.

Then the 100 points of 1 lot of USDJPY is 954.2622/100, which is about $9.50, that is, the profit and loss of 1 point of 1 lot is $9.50.

For GBPUSD:

At moment 1, I bought 1 lot (100,000 pounds) of GBPUSD, at which point I exchanged $132,780 for £100,000.

At Moment 2, the 1 lot GBPUSD contract has risen to a price of $133,780, and the position squaring a profit of $1,000.

Then 100 points of 1 lot of GBPUSD is 1000/100, which is $10, that is, the profit and loss of 1 lot of 1 point of $10.

For GBPJPY:

At moment 1, I bought 1 lot (100,000 pounds) of GBPJPY, which cost 13781600 yen.

At moment 2, the contract of 1 lot GBPJPY has risen to the price of 14,019,200 yen, position squaring, profit 237,600 yen, at this moment it is converted back to the dollar to get $2267.327.

Then the 100 points of 1 lot of GBPJPY is 2267.327/237.6, which is about $9.50 (in fact, even if you take a few more decimals, the point value of USDJPY is the same), that is, the profit and loss of 1 point of 1 lot is $9.50.

The above is the specific calculation method. If you are still too lazy to calculate, remember the inference.

1. Direct currency pairs quoted forward:

EURUSD, GBPUSD, AUDUSD, NZDUSD, the pip value of a point is always $10.

2. Direct currency pairs quoted in reverse:

USDJPY, USDCHF, USDCAD, pip value = 10/the direct exchange rate quoted in the opposite direction (Japanese yen to be multiplied by 100)

For example, the point value of USDJPY is 10/104.793 * 100 = 9.5.

Most of the time it's around 10.

3. Cross disk

(1) End of the forward quoted direct currency (GBP, AUD, NZD)

Point value = currency exchange rate at the end * 10

For example, if EURGBP is quoted at 0.89450, then if GBPUSD is 1.32699, then the pip value is 1.32699 * 10 = $13.27 (1 pip per lot).

(2) Direct currency end of reverse quote (JPY, CHF, CAD)

End of CHF or CAD: pip value = 10/direct exchange rate

End of JPY: pip value = 10/direct exchange rate * 100

For example, the point value of GBPJPY is 10/104.793 * 100 = 9.5.

The point value calculation of foreign exchange may be one of the things that troubles beginners at the beginning of trading. Understanding the point value of foreign exchange is crucial for traders. It can help traders calculate the potential amount of profit and loss. For example, if a trader buys 1 lot (100,000 units) of the contract on the EUR/USD currency pair, he will make a profit of $1 when the Forex point value rises by 0.0001. Likewise, if the Forex point value falls by 0.0001, he will lose $1.

In addition, the Forex pip value is also used to calculate a trader's leverage ratio. Leverage is a lending mechanism that allows traders to control a larger amount of money with less money. By knowing the Forex pip value, traders can calculate their leverage ratio and thus better manage risk.