Gold is traded in a variety of ways, with the most basic being buying physical gold. However, tremendous technological advancement has led to alternative ways of trading gold.
Unlike opening an electronic gold trading position, buying physical gold is usually more expensive largely due to manufacturing costs, storage costs and costs associated with converting physical gold to cash.[1]
Trading gold electronically can be done in various ways, such as trading futures contracts on gold, gold ETFs (exchange-traded funds) and gold contracts for difference (CFDs).
Throughout this article, we will dive into the meaning of pips for gold traders and how to calculate gold pips when trading CFDs on this volatile asset.
What are Pips in Gold?
A pip in forex trading represents the smallest price change that a currency pair can make. For most currency pairs, a pip is typically the fourth decimal place, equivalent to 0.0001. However, when trading gold, denoted as XAUUSD, the pip takes on unique characteristics.
Gold pips are different because they are measured in increments of $0.01, meaning each pip movement equates to a $0.01 change in the price of gold. In this context, $1 corresponds to 100 pips. Understanding this conversion is crucial for traders to accurately calculate potential gains or losses.
For example, in XAUUSD trading, if the gold price moves from $1,900.00 to $1,900.01, that’s a 1 pip change. To determine the pip size, consider trading one lot (100 ounces) of gold. If the price moves by 1 pip ($0.01), the total change in value would be $1 (0.01 x 100 ounces). This way, traders can calculate their exposure and potential profits based on the pip size and the number of lots traded.
How to Calculate Gold Pips
Calculating gold pips is crucial for traders to understand their potential profit or loss from price movements in gold trading. To start, it’s important to reiterate that 1 pip in gold trading represents a $0.01 change in the price of gold per ounce.
Example 1:
Suppose a trader is trading with XAUUSD and the price of gold per ounce rises from $1,950.00 to $1,950.01, representing a movement of 1 pip. If the trader is handling 100 ounces of gold, the calculation for the total value change due to this pip movement would be:
Total Value Change = Number of ounces traded x Pip movement = 100 ounces x $0.01 = $1.00
This calculation shows that a 1 pip movement, when trading 100 ounces of gold, results in a total value change of $1.00. This example helps traders understand the direct impact of pip movements on their trading positions.
Example 2:
Consider a scenario where there is a 10 pip increase in the price of gold, moving from $1,950.00 to $1,950.10. This indicates a 10-pip movement. To calculate the change in value for this movement when trading 100 ounces of gold, you would multiply the number of ounces by the change per pip:
Total Value Change = Number of ounces traded x Pip movement = 100 ounces x $0.10 = $10.00
This example helps traders understand how a 10-pip movement, when trading 100 ounces of gold, will result in a total value change of $10.00.
Example 3:
For a larger scale example, consider a 100-pip increase where the price of gold rises from $1,950.00 to $1,951.00. This represents a significant $1.00 change per ounce of gold, constituting a 100-pip movement. If a trader is involved with a position of 100 ounces of gold, the calculation for the total value change would be:
Total Value Change = Number of ounces traded x Pip movement = 100 ounces x $1.00 = $100.00
This calculation demonstrates the substantial impact that a 100-pip movement can have when trading 100 ounces of gold, resulting in a total value change of $100.
Calculating Profit and Loss with Pips
If you purchased one ounce of gold, a 100-pip movement will make a difference of $1 in your gold trading account. You can calculate your potential profit by simply multiplying the distance to your target by your trade size.
For instance, if you buy 20 ounces of gold at $1,250 with a take profit of $1,251.12, it simply means that you’ve targeted a gain of 112 pips. Therefore, this should be multiplied by the number of ounces: 112 pips x 20 ounces = 2,240 pips.
This can be converted to dollars by simply multiplying the number of pips by the cost of $0.01. Therefore, 2,240 pips x $0.01 = $22.40. This is the profit on 20 ounces if a profit target of 112 pips ($1.12) is attained.
It is essential to keep in mind that there’s a huge difference between a pip in forex and a gold trading pip. The pip value on the EUR/USD is $0.01, which is ten times the value of a gold pip. This means that a 100-pip move in the value of gold can be compared to a 10-pip move in the EUR/USD.
Conclusion
Vantage gives you the opportunity to start trading gold CFDs simply, quickly and in both USD and AUD contracts. Contracts-for-Difference or CFDs allow you to speculate on the price movements of a financial instrument without owning the underlying asset. With up to 20:1 leverage, you can go short or long the precious metals with very competitive spreads.
At Vantage, you can trade gold CFDs with no overnight fees (swap-free) and save your trading costs. Follow the link below to find out how you can get started with gold CFDs trading at a lower cost.
Reference
- “nama-building-guidebook.pdf – UNEP DTU Partnership.” https://unepdtu.org/wp-content/uploads/2018/11/nama-building-guidebook.pdf. Accessed 15 Apr. 2022.
- “9 Tips for Trading Gold (XAU/USD) – Valutrades.” 30 Aug. 2020, https://www.valutrades.com/en/blog/5-tips-for-trading-gold-xau-usd?hs_amp=true. Accessed 15 Apr. 2022.