Foreign exchange basis point calculation formula

2023-08-03
Summary:

In forex trading, traders usually formulate trading strategies and conduct trading operations based on basis points. The use of base points helps us more accurately measure and represent changes in exchange rates.

For forex basis points, commonly referred to as "pips" (in English, pips), the minimum unit of exchange rate change is 1 basis point, which is the change of the last digit in the exchange rate. Each change of 1 unit is called a change of one forex basis point. For example, if the exchange rate of EUR/USD changes from 1.2160 to 1.2161, then the EUR/USD exchange rate has increased by 1 basis point. Except that the yen exchange rate is 1 basis point in the second place after the Decimal separator (for example, if the USD/JPY exchange rate changes from 116.30 to 116.29, then the USD/JPY exchange rate drops 1 basis point), the exchange rate of other currencies is calculated based on the fourth place after the Decimal separator.

Foreign exchange basis point

It is worth noting that according to market practice, the bid price of the forex rate is usually composed of Significant figures containing "4" and "2" digits after the Decimal separator. However, in recent years, many forex dealers have introduced the bid price representation of the forex rate containing "5" and "3" digits after the Decimal separator. The "5" and "3" after the Decimal separator are called fractional pips, that is, one tenth of the forex base point. For example, if the exchange rate of EUR/USD changes from 1.21600 to 1.21601, then the EUR/USD exchange rate has increased by 1 percentage point.


To know how to make money by investing in forex, one must learn how to calculate the basis point value of forex. Below are some examples to illustrate.

1. When the US dollar and USD are used as the base currencies in a currency pair, the calculation formula for one forex basis point is as follows:

Forex basis point value =. 0001 ÷ currency to exchange rate

For example, if the USD/CHF exchange rate is 1.2020, then the one basis point value of the USD/CHF currency pair is 0001 ÷ 1.2020 = 0.000819

The USD/JPY exchange rate is 123.15, so the one basis point value of the USD/JPY currency pair is 01 ÷ 123.15 = 0.000812.


2. When the US dollar is used as the relative currency in a currency pair, such as AUD/USD or GBP/USD, The 1 basis point value of EUR/USD is approximately 0.0001.


We usually do not need to calculate this forex basis point value, as all forex traders will help you calculate it. However, knowing the calculation method of forex basis points is always invaluable.


Disclaimer: Investment involves risk. The content of this article is not an investment advice and does not constitute any offer or solicitation to offer or recommendation of any investment product.

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