How do I calculate the value of a pip on my forex trades?

Overview: 

 

The pip (the equivalent of a tick in most other asset classes) value varies depending on the particular currency pair and the amount of cash being traded.  The definition of a pip is; the smallest price change that a given exchange rate can make.  Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point (for most pairs this is the equivalent of 1/100th of one percent, or one basis point).  As a result of this, the value of a pip is going to be dependent on the quantity that is being traded.  In order to determine the pip value a trader needs to know the following information:

 

  1. The quantity being traded
  2. The execution price
  3. The price increment
Background: 

For example, if a trader were to open a position with the following trade: buy 50,000 EUR.USD @ 1.36300, the value of this transaction is 50,000 * 1.36300 = 68,150.00 USD.  EUR.USD trades in .00005 increments (this can be seen in the TWS by clicking and holding on the price field in an order line).  Given that one pip or tick is .00005, we can assume that the position is closed one pip higher and compute the value of the trade as follows: sell 50,000 EUR.USD @ 1.36305 (trade one pip higher), the value of this transaction is 50,000 * 1.36305 = 68,152.50 USD.  The difference between the value of the first and second trade is the value of one pip.  Purchase value = 68,150.00 USD; sale value = 68,152.50 USD.  The difference (or pip value) = 2.50 USD.  To determine the pip value in terms of the trading currency (EUR in this example), use the inverse of the trade price when computing the value (example: 1/1.36305 instead of 1.36305).