What a pip is worth in money

A lot is a standard bundle of units of the base currency. In the examples on this page the base currency is the Australian dollar, because the pair is written AUD/USD. The size of the bundle is what turns a price step into money. A mini lot is 10,000 units, a micro lot is 1,000 units, and a standard lot is 100,000 units. Some platforms also allow 0.01 lots, which is 1,000 units.

The arithmetic is the same at every size. Multiply the units by 0.0001 to get the pip value in the quote currency, which here is the US dollar. Then divide by the AUD/USD rate to express that figure in Australian dollars. If the rate is 0.6640, one pip on 10,000 units is 10,000 x 0.0001 = US$1.00, and 1.00 / 0.6640 = A$1.51, rounded to two decimals.

This is why the same twenty-pip move pays different amounts. Twenty pips on 10,000 units is 20 x A$1.51 = A$30.20. Twenty pips on 1,000 units is one tenth of that, A$3.02. The price move is identical in both cases. Only the number of units changes, and the units are chosen before the trade is placed.

A common error is to compare trades by pips alone. Two trades can both gain twenty pips and still produce results that differ by a factor of ten. The pip count describes the market. The lot size describes the position. Money depends on both.

The formula above works because the quote currency is the US dollar and the account currency is the Australian dollar. When a pair is quoted in a different currency, the conversion step changes. The pip value first appears in the quote currency of that pair, and it must then be converted into Australian dollars at whatever rate applies to that conversion.

Suppose a pair is quoted in Japanese yen. One pip is still a step of 0.01 in the quote, not 0.0001. The pip value in yen depends on the lot size, and turning yen into Australian dollars uses the AUD/JPY rate, not the AUD/USD rate. A platform may show the result directly, or it may show the figure in the quote currency and leave the conversion to the account.

Brokers differ in how they handle this. Some convert automatically at the prevailing rate. Some show pip value in the quote currency and convert only when the position closes. The rate used at conversion may be the rate at entry, at exit, or a rate set by the broker. These details vary between brokers, and the platform documentation is the place to check them.

The practical point is that pip value is not a property of the pip. It is a property of the pip, the lot size, the pair, and the account currency taken together. Change any one of those and the money figure changes.

The pip values calculated so far are gross figures. They ignore the cost of entering and leaving the trade. On most platforms the quoted price comes with a spread, which is the gap between the price at which the platform will buy and the price at which it will sell. The spread is usually measured in pips, and it is paid on entry.

A spread of one pip on a 0.05-lot AUD/USD trade costs roughly A$0.75 at a rate of 0.6640, using the same arithmetic as before. Some accounts charge a commission instead of, or as well as, a wider spread. Commission is usually a fixed amount per lot per side, and it varies between brokers. The gross result of a trade is reduced by these costs before any net figure is reached.

Rounding is the last adjustment. Platforms often round pip value to two decimal places, and the executed rate may differ slightly from the rate used in the calculation. A stop level may also be filled at a different price from the one requested. None of this changes the method. Work out the gross figure, subtract the spread and any commission, and treat the result as an estimate rather than an exact amount.

For planning, the estimate is enough. If the estimated loss on a stop is already larger than the amount the account can lose without affecting other plans, the trade is too large regardless of the small adjustments. The purpose of the calculation is to make that judgement before the trade is placed, not after.