Forex pips are how currency trading profit and loss are calculated.  Currencies are traded at fractions of a penny, measured in pips.

They are the units of change.  For most currency pairs, it goes up to 4 digits after the decimal point.  For the Japanese Yen (JPY) the forex trading pip is two digits.

So for example, if the USD/CAD is at 1.0455 and it changes to 1.0460, we say that it has gone up 5 pips.  The forex profit by the change in pips.

The reason it is so minuscule is because currencies are traded at very large volumes.  The standard lot for forex trading is 100,000 units.  A mini lot would consist of 10,000 units.  So when you are trading 100,000 units of EUR/USD, even a fraction of a penny will make a significant difference.

Profit and Loss Calculation with Forex Pips

So here is how to calculate your profit and loss based on the forex pip value.  Let’s say you are going long on USD/CAD and it is currently at 1.0422.  You buy a standard lot of 100,000 units for a total trading position of 104,220 (100,000 x 1.0422).

Now let’s say the USD/CAD goes up to 1.0480.  It just went up 58 pips (1.0480 – 1.0422 = 58) and you sell.  You just made $580 (.0058 x 100,000).

Forex Margin Account

Now it may seem like trading 100,000 units or even 10,000 units of currency would be out of the question for most individual retail traders.  Besides, what average joe trader can afford that much trading capital.  The answer is that most traders use forex margin to increase their trading power.

The downside to forex margin trading is that you must always have a certain amount on deposit in proportion to your trading position.  If you’re trading position is losing, you have to have enough in your margin account to cover the requirement your forex broker determines for you.  If you don’t, you might get your trading position closed out.

Importance of Calculating Profit and Loss

Most forex trading platforms automatically calculate your profit and loss for you, but only on trading positions that you have entered.  It is important for you to understand how to calculate forex pips and profits so that you can develop your forex trading strategies accordingly.  If you can’t anticipate profit and loss, you are not building a solid trading plan.

That also means you might not have enough in your margin account to accommodate normal volatility that happens in the forex market.  If you calculate it beforehand, you can know how large of a position you can enter without getting prematurely closed out of your trading position.