Pip value for non USD accounts: are 3 currencies in play?

Hi,

Right now I'm reading some ForexFactory threads on how to calculate pip value. I would like to make sure that given a stop loss at let's say 2x the ATR When it is hit I loose an exact percentage of my capital.

As far as I understand when I buy or sell EUR/USD my GBP is first converted to USD. Then the profit or loss depends on the relative value change of the dollar and the euro. This is all fine.

But in the meantime there will be a relative value change between the dollar and the GBP, and once I will close the transaction the money I (temporaraily) have in dollars will need to be converted back to pounds. So it seems like there are two transactions both ways: a GBP/USD and a EUR/USD one.

How do I factor this in to my calculation? Do I need to, or is my thought process incorrect? Not a lot seems to be mentioned about this aspect of the pip value.

(Please consider any possible correlation between EUR and GBP value irrelevant.)

You are describing a cross rate calculation here, which requires two currency pairs to calculate your risk in GBP. The first pair is the trade pair, and the second pair is your conversion pair.

With your EUR/USD example, you know that when the trade is closed, it will be settled in USD - the settlement currency. Therefore, you will need to exchange your USD for GBP using the conversion pair - in this case, GBP/USD. You need to check when calculating that you are using the correct price - Ask or Bid to convert back to your GBP. Will you be buying from, or selling to the broker?...

Hope that points you in the right direction?

Hi Castor,

Let's keep it as simple and clear as we can:
You really have 3 things to know

1. A trade generates a profit or loss, and only this amount has to be (eventually) converted in your base currency.
2. When you trade a pair, the amount you are trading is in the first currency.
3. And the profit or loss is calculated in the second currency. Every pip is in this second currency.

So, buying or selling EUR/USD means you buy or sell 100.000 EUR for 1 lot (10K for 1 mini lot aka 0,1 lot - 1K for 1 micro lot aka 0.01 lot)
Every pip will have a value of 10 USD (10 for 1 lot - 1 for 1 mini lot - 0,10 for 1 micro lot)
And you convert this amount of profit or loss (pips x 10 USD) using the pair corresponding to your base currency (in your case, you divide by GBP/USD to convert USD to GBP)

It means that the pip value of a pair with a second currency different from your base currency will change according to the exchange rate beetween the second currency and your base currency. You cannot know in advance exactly how much will be your profit or loss in this case, if you setup a S/L or T/P. You know how much pips it does, but not what will be the exact value of this pips (you know the value in the second currency of the pair, but not in your base currency)

For you knowledge, when you enter a forex transaction the 2 currencies of the pair are borrowed and lent depending of the direction of your trade, and you end up with a profit or loss in the second currency, which may have to be converted then in your base currency. Your base currency isn't even used in the transaction if it isn't any of the 2. It is only used as "margin" to secure the borrow/lend transaction.

Thanks for your answers.

It seems to be clear now that the exact amount I loose when my SL is hit cannot be determined when entering the trade as it depends on the GBP/USD rate at the time of exiting the trade (using my example of trading EUR/USD with a GBP account).

How could I get around this issue? To at least estimate my potential loss in GBP with a "good enough" accuracy? Anyone who cares about risk management at least a bit and trades using a non USD acount must have faced this quetion before so there has to be a method for doing this... Or should I just use the GBP/USD rate at the time of entering the trade? That doesn't seem to be a too good way...

Any ideas?

4 ideas:

Anticipate GBP/USD too. So you "trade" a little bit that pair too (only for your expected P/L amount)

Use an EA to adjust S/L or directly close the trade by tracking the P/L (but this may modify the risk/reward ratio or affect your trade because of your base currency)

Take a trade in GBP/USD too to offset the expected P/L, but for this, you have to trade big to be able to use micro lots to do it, or have a broker which gives you access to very small lots increments. (and this may be a problem if you decide to exit your trade before reaching the expected P/L) EDIT: After reading again, I realize, you can't because you don't know which way to enter this trade, it depends if you win or loose your principal trade ! This is also true for the first idea...

Do nothing at all like most traders I guess: Bothering to think about how much it will exactly do in your base currency is probably a waste of time more than anything else. Most people think in term of PIPS. And all this will average itself with time. Sometimes you will win or loose a little bit more or less depending of the strengh of your base currency compared to the second one of the pair you trade, sometimes it will be the opposite. At the end, doesn't make much difference.

"Do nothing at all like most traders [...] and all this will average itself with time"

if this is the case then I guess using the GBP/USD rate at the point of entering the trade is a good enough approach too and probably the easiest to implement. I think I am going to do it this way, I just feel like I have to relate, some way, my sl to the actual money lost in case it is hit. It doesn't have to be exactly x% of my capital though, just a value close enough to x (It is not a big overhead for me to deal with this question, the code for it must be written only once...)

On the other hand reading your reply I was thinking about whether this could be done better if I traded GBP/USD instead of EUR/USD. It is my understanding though that the loss would still need to be converted back to GBP when my sl is hit so it doesn't make any difference.

if your max float less then a month you can ignore GBP to USD & reverse, it will have minor effect on your P/L
for the PIP value you should use TICK value of ınstrument traded

This is how I do it....

Variables for this hypothetical example:
Account balance: £50,000.00
Risk per trade: 1%
Trade pair: EURUSD
Conversion pair: GBPUSD

Step 1
When the trade is settled, the profit or loss will be in USD, so you will then have to exchange these USD's for GBP, which will be transacted at the ASK price.

So convert GBP risk amount to USD using the ASK price.

$ risk = 50,000 * 1% * GBPUSD ASK price(1.6392)
$ risk = 819.60

Step 2

Calculate Euro position size:
Euros = ($ risk / ABS(Open price - Stop price))
Euros = (819.60 / (1.2923 - 1.2834))
Euros = 92,090

Open trade - buy 92,090 Euro at Ask price of 1.2923 = $119,008
Close trade- sell 92,090 Euro at Bid (stop price) of 1.2834 = $118,188
Settlement = open - close
Settlement = 119008 - 118188
Settlement = -$820

So you have a loss of $820, which has to be converted to GBP. At the beginning of the example I used the current GBPUSD ASK price, rather than the Ask price when the stop was hit. What is the difference?...

Using the current ASK, the loss would be: -820/1.6392 = -£500.24
Using the actual ASK, the loss would be: -820/1.6308 = -£502.82

Obviously there is a slightly larger loss, but there will be other examples where the conversion will actually reduce the size of the loss slightly, so there will be some balancing out in the longer term.

At the end of the day, you will have to run your own scenarios and decide how you want to handle the inaccuracy brought about by the conversion...

Regards,

OD

That seems damn complicated to me, but everyone does like he wants.
No MT4 broker allow you to open a "92.090" EUR trade size. 92K yes (0.92 lots), but 1K is the smallest increment.


If you win your trade only. He you loose, you will have to exchange GBP for USD to cover the loss.


Here is how I do it, just for info:
1 lot = 10 USD per pip
10 / GBP/USD = pip value in GBP

Then you decide your trade size and P/L simply based on this pip value. Done.