Value of a Pip on a US Dollar Base Currency Pair
In Forex, currency pairs are simultaneously traded resulting in a profit or loss which is measured using pips. A Forex quote is comprised of the bid/ask price that you may buy/sell one of the base currency for the counter currency in the pair. So, a USD/CAD quote of 1.4014/1.4024 means that you may sell one US dollar for $1.4014 Canadian and buy one US dollar for $1.4024 Canadian. But what if you have a US dollar Forex account and traded USD/CAD, will your account reflect the value of a pip in Canadian dollars?
No, pip values are reflected in the same currency as your Forex account. So, a US dollar account will be credited for profits and debited for losses in US dollars.
The value of a pip can be quickly assumed when the US dollar is the counter currency in a pair. Because as long the US dollar is the counter currency, a pip typically equals $0.0001 US when it's rounded off. For example, if you trade EUR/USD, a pip for a 100,000 lot is usually $10 US.
When we trade with a US dollar base currency pair, the value of a pip isn't always $0.0001 US. We can get the pip value with a US dollar base currency using this formula: 0.0001 (or 0.01 for Japanese yen) / exchange rate = US dollar value of a pip.
Let's say you traded USD/CAD quoted at 1.4024, the value of a pip is 0.0001 divided by 1.4024 or $0.0000713 US. So if you trade a 100,000 lot on this quote, it means a pip on your position has a value of US $7.13. And for a currency pair that can move five to ten pips in a few minutes, it will earn a profit or incur a loss rather quickly. And keep in mind that with every change in its market price, the value of a pip changes as well.
When you have a US dollar trading account, it'll be credited and debited in US dollars so don't be confused if you're trading with a US dollar base currency pair. The value of a pip requires some computation because you can't immediately assume that a pip value will be $0.0001 US. It will equal 0.0001 (or 0.01 for Japanese yen) divided by the exchange rate on the currency pair. And if you have a US dollar Forex account and you intend to trade a pair with the US dollar base currency, you'll be more confident in making decisions when you have the real value of a pip on your position.