So now that you know how to calculate pip value, let’s look at how you calculate your profit or loss.
Let’s buy US dollars and Sell Swiss Francs (USD/CHF).
The rate quoted is 1.40525 / 1.40530. Because you are buying US Dollar you will be working on the 1.40530 (the rate at which traders are prepared to sell).
You buy 1 lot of $100,000 at 1.40530.
A few hours later, the price moves to 1.40550 and you decide to close your trade. The new quote for USD/CHF is 1.40550 / 140555.
Since you’re closing your trade and you initially bought to enter the trade, you now sell in order to close the trade so you must take the 1.40550 price.
The price traders are prepared to buy at.
The difference between 1.40530 and 1.40550 is .00020 or 20 pips. Using our formula from before, we now have (.00010/1.4550) x $100,000 = $6.87 per pip x 20 pips = $137.40
Remember, when you enter or exit a trade, you are subject to the spread in the bid/offer quote.
When you buy a currency you will use the offer price and when you sell you will use the bid price.
So when you buy a currency, you pay the spread as you enter the trade but not as you exit. And when you sell a currency you don’t pay the spread when you enter but only when you exit.