How to Calculate Forex Price Moves

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4. How to Calculate Forex Price Moves

A pip is the unit of measurement to express the change in price between two currencies.

Just like a pip is the smallest part of a fruit, a pip in forex refers to the smallest price unit related
to a currency. The term ‘pip’ is actually an acronym for ‘percentage in point’.

Professional forex traders often express their gains and losses in the number of pips their position
rose or fell.

For example, if the EUR/USD moves from 1.2712 to 1.2713, that 0.0001 rise in the exchange
rate is ONE PIP.

All major currency pairs go to the fourth decimal place to quantify a pip apart from the Japanese
Yen which only goes to two.

Some brokers only quote to the fourth and second decimal place (for JPY pairs) but others,
including AVA Trade, quote to the fifth decimal place of the currency to provide even greater
accuracy when measuring gains and losses. This fifth decimal place is what we call a pipette –
one tenth of a pip.

So for example if the EURUSD moves from 1.27128 to 1.27129, we can say it has moved one
pipette or 0.1 pips (1 tenth of a pip).

Calculating the value of 1 PIP movement

So now that we know what a pip is, what does it mean to us in terms of how much money we
make or lose for each movement?

Well this depends on the size of the position we opened. Larger positions mean each pip
movement in the pair will have greater monetary consequence to our balance.

To calculate this it is quite simple. We simply multiply our position size by 0.0001 (i.e. ONE
PIP):

Let’s take an example and stick with our EURUSD pair. We can forget what price it is trading at
for now and we’ll concentrate on how much money a pip move will be for various position sizes.

So say we wanted to open a position size of 10,000 units.

Our calculation to establish what a one pip movement means to us is as follows:

10,000 (units) * 0.0001 (one pip) = $ 1 per pip

So a position of 10,000 (BUY or SELL) means that every time the pair moves 0.0001 (i.e. ONE
PIP) then we will make a profit or loss of $1.00 depending on which way it moved.

Therefore, for a position of this size – 10,000 units – we will gain or lose $1 for every pip
movement in either direction. So if the EUR/USD moves 100 pips (i.e. 1 cent) in our direction
we will make $100 profit.

We can do this for any trade size. The calculation is simply the trade size times 0.0001 (1 pip).

5,000 (units) * 0.0001 (one pip) = $ 0.50 per pip

60,000 (units) * 0.0001 (one pip) = $ 6 per pip

123,000 (units) * 0.0001 (one pip) = $ 12.30 per pip

Our pip value WILL ALWAYS BE MEASURED IN THE CURRENCY OF THE QUOTE
CURRENCY OF THE FX PAIR i.e. the currency on the right-hand size of the pair.

So in the example of the EURUSD we see our pip value is always in US Dollars.

If we were trading the EURGBP pair, the pip value will be in Pound Sterling.

So…
10,000 units * 0.0001 = £ 1.00 per pip

Therefore the final calculation we must consider is if we have a trading account in a different
currency denomination, as brokers offer accounts in US Dollar, Euro, Pound and Yen.

So let’s say we have a Euro platform taking our EURGBP example above and the current
EURGBP exchange rate is 1.5000.

Then each pip movement of 1.00 would be automatically converted by our broker to – we simply
divide 1$ by the current EURUSD rate which is 1.26500 which equals 0.79c.

If we are using a GBP platform one pip will equal 1$/1.59500 (the GBPUSD rate) or 0.63 pence.

These calculations will be done automatically on our trading platform but it is important to know
how they are worked out.

At this point you may be asking ‘how can I trade such large positions such as 10,000 units of a
currency pair? That sounds like a very large investment!’ The answer to that question is leverage
which we will discuss in another article.
Position Sizing
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Now that we’ve learned the hard lesson of trading too big, let’s get into how to correctly use
leverage using proper “position sizing.”

Position sizing is setting the correct amount of

units to buy or sell a currency pair.
It is one of the most crucial skills in a forex trader’s skill set.

Actually, we’ll go ahead and say it is THE most important skill.

Traders are “risk managers” first and foremost, so before you start trading real money you
should be able to do basic position size calculations in your sleep… or at least after you wake up,
still groggy, and try to trade the NFP report!

Finding the position size that will keep you within your risk comfort level is relatively easy…and
we use the phrase “relatively easy” loosely here.

Depending on the currency pair you are trading and your account denomination (is your account
in dollars, euros, pounds, etc.), a step or two needs to be added to the calculation.

Now, before we can get our math on, we need five pieces of information:
 1. Account equity or balance
2. Currency pair you are trading
3. The percent of your account you wish to risk
4. Stop loss in pips
5. Conversion currency pair exchange rates

Easy enough right? Let’s move on to a few examples.

Calculating Position Sizes
To make things easier for you to understand, as usual, we’ll be explaining everything with an
example.

This is Newbie Ned.

A long time ago, back when he was even more of a newbie than he is now, he blew out his
account because he put on some enormous positions.

It was as if he was a gun slinging cowboy from the Midwest – he traded from the hip and traded BIG.

Ned didn’t fully understand the importance of position sizing and his account paid dearly for it.

He re-enrolled into the School of Pipsology to make sure that he understands it fully this time,
and to make sure what happened to him never happens to you!

In the following examples, we’ll show you how to calculate your position size based on your account size
and risk comfort level.

Your position size will also depend on whether or not your account denomination is the same as
the base or quote currency.

If your account denomination is the same as the counter currency…

Newbie Ned just deposited USD 5,000 into his trading account and he is ready to start trading
again. Let’s say he now uses a swing trading system that trades EUR/USD and that he risks
about 200 pips per trade.

Ever since he blew out his first account, he has now sworn that he doesn’t want to risk more than
1% of his account per trade.

Let’s figure how big his position size needs to be to stay within his risk comfort zone.

Using his account balance and the percentage amount he wants to risk, we can calculate the
dollar amount risked.

USD 5,000 x 1% (or 0.01) = USD 50

Next, we divide the amount risked by the stop to find the value per pip.

(USD 50)/(200 pips) = USD 0.25/pip

Lastly, we multiply the value per pip by a known unit/pip value ratio of EUR/USD. In this case,
with 10k units (or one mini lot), each pip move is worth USD 1.
USD 0.25 per pip * [(10k units of EUR/USD)/(USD 1 per pip)] = 2,500 units of EUR/USD

So, Newbie Ned should put on 2,500 units of EUR/USD or less to stay within his risk comfort level with
his current trade setup. Otherwise, he’d be regressing back to his previous gambling self.

Pretty simple eh?

But what if your account is the same as the base currency?

If your account denomination is the same as the base currency…

Let’s say Ned is now chilling in the euro zone, decides to trade forex with a local broker, and
deposits EUR 5,000.

Using the same trade example as before (trading EUR/USD with a 200 pip stop) what would his
position size be if he only risked 1% of his account?

EUR 5,000 * 1% (or 0.01) = EUR 50

Now we have to convert this to USD because the value of a currency pair is calculated by the
counter currency. Let’s say the current exchange rate for 1 EUR is $1.5000 (EUR/USD =
1.5000).

All we have to do to find the value in USD is invert the current exchange rate for EUR/USD and
multiply by the amount of euros we wish to risk.

(USD 1.5000/EUR 1.0000) * EUR 50 = approx. USD 75.00

Next, divide your risk in USD by your stop loss in pips:

(USD 75.00)/(200 pips) = $0.375 a pip move.

This gives Ned the “value per pip” move with a 200 pip stop to stay within his risk comfort level.

Finally, multiply the value per pip move by the known unit-to-pip value ratio:

(USD 0.375 per pip) * [(10k units of EUR/USD)/(USD1 per pip)] = 3,750 units of EUR/USD

So, to risk EUR 50 or less on a 200 pip stop on EUR/USD, Ned’s position size can be no bigger
than 3,750 units.

Still pretty simple, eh?

Well now it gets slightly more complicated.

How to Calculate Your Position Size in
Different Forex Pairs and Account
Currencies
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Let’s say you want to buy EUR/GBP and your broker account is denominated in USD.

In this trade, you only want to risk USD $100. But you’re not trading US dollar, you are trading
euros and pounds. How do you calculate your position size?

In this lesson, we’ll teach you how to determine your position size if you are trading currency
pairs that aren’t in your account denomination.

If your account denomination is not in the currency pair

traded, but the same as the conversion pair’s counter
currency…
Example: USD account trading EUR/GBP

Ned, who we introduced in the previous lesson, is back in the U.S. Today, he decides to trade
EUR/GBP with a 200 pip stop.
To find the correct position size, we need to find the value of Ned’s risk in British Pounds.

Remember, the value of a currency pair is in the counter currency.

Step 1: Determine risk amount in USD

Okay, let’s straighten things out here. He’s back trading with his U.S. broker selling EUR/GBP
and he only wants to risk 1% of his USD 5,000 account, or USD 50.

To find the correct forex position size in this situation, we need the GBP/USD exchange rate.

Step 2: Convert USD risk amount to GBP

Let’s use 1.7500 and because his account is in USD, we need to invert that exchange rate to find
the proper amount in British Pounds.

USD 50 * (GBP 1/USD 1.7500) = GBP 28.57

Now, we just finish the rest the same way as the other examples.

Step 3: Convert GBP risk amount to pips

Divide by the stop loss in pips:

(GBP 28.57)/(200 pips) = GBP 0.14 per pip

Step 4: Calculate for position size

And finally, multiply by the known unit-to-pip value ratio:

(GBP 0.14 per pip) * [(10k units of EUR/GBP)/(GBP 1 per pip)] = approximately 1,429 units of
EUR/GBP

Ned can sell no more than 1,429 units of EUR/GBP to stay within his pre-determined risk levels.

If your account denomination is not in the currency pair

traded, but the same as the conversion pair’s base
currency…
Example: CHF account trading USD/JPY

Ned decides to go snowboarding in Switzerland, and in between a couple of double black

diamond runs, he opens up his trading account on his super spy phone with a local forex broker.
He sees a great setup on USD/JPY, and he has decided that he will get out of the trade if it goes
beyond a major resistance level–about 100 pips against him.

Step 1: Determine risk amount in CHF

Ned will only risk the usual 1% of his CHF 5,000 account or CHF 50.

Step 2: Convert CHF risk amount to JPY

First, we need to find the value of CHF 50 in Japanese yen, and since the account is the same
denomination as the conversion pair’s base currency, all we have to do is multiply the amount
risked by CHF/JPY exchange rate (85.00):

CHF 50 * (JPY 85.00/ CHF 1) = JPY 4,250

Now, we just finish the rest the same way as the other examples.

Step 3: Convert JPY risk amount to pips

Divide by the stop loss in pips:

JPY 4,250/100 pips = JPY 42.50 per pip

Step 4: Calculate for position size

And finally, multiply by a known unit-to-pip value ratio:

JPY 42.50 per pip * [(100 units of USD/JPY)/(JPY 1 per pip)] = approximately 4,250 units of
USD/JPY

Shabam! There you have it!

Ned can trade no more than 4,250 units of USD/JPY to keep his loss at CHF 50 or less.

Summary: Position Sizing

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After journeying across the globe with Newbie Ned, and through some basic position sizing
examples, you’re well on your way to becoming a seasoned risk manager.

Now knowing how to set the correct position sizes is only a part of what it takes to become a pro
at risk management.

The other part is discipline.

Stick to your stops and pre-determined risk comfort levels and you’ll be sure to have enough
after your losses to take advantage of profitable opportunities.

Position Sizing Calculator

Finally, we know that you won’t always have a calculator handy or a position sizing feature
included with your trading platform, so we here at BabyPips.com have decided to take it upon
ourselves and have built a handy-dandy position sizing calculator for you!

Bam! Aren’t we cool?

C’mon… Time to start a slow clap… Okay, nevermind.

Use the calculator if you need it…

Actually, use it first every single time you decide to put a trade on.

As the old adage goes, “Better be safe than sorry!”