How can pip value manage risk

Beginner Questions
1

Hello

I have read alot of info around the web on pip value and how to calculate it.
Unless i have misunderstood it, i thought pip value was to calculate how much profit or loss you have made?

But then i read babypips section on pip value and it said it is to manage your risk? How can working out the pip value manage my risk?

I thought i would put my stop losses in, work out correct position size and leverage and how much money i am risking.

How can knowing pip value manage my risk further?

I haven’t started demo trading yet as want to make sure i know about these things first!

2

Pip value has everything to do with managing your risk, but you would need to identify your trading goals for some clarity.

But just for conversation’s sake, let’s say you open an account for $1,000.00.

Say your risk is the standard 2% per trade. With an account that size, you could trade up to $3 pips. But with the 2% risk, rounded up a tad you would only have 6 pips for a stop.
Ratchet that down a bit to a buck a pip, your stop moves up to 20 pips.

With either option there, you would most likely be looking at getting stopped out quickly.

Take it to $0.10 pips, and you would be looking at a 200 pip stop loss.

Which one gives you the best option for a positive outcome?

Again, it depends on your personal goals, and quality of entry signals.

3

We measure price movement in pips. And we measure profit and loss in dollars, or euro, or whatever your account currency is.

If you have an account denominated in dollars, let’s say, and you have a winning trade which earns you 50 pips, how much is that in dollars?

[B]The only way you can answer that question is if you know how much 1 pip is worth. In other words, you need to know the pip-value.[/B]

Let’s say you have a mini-account denominated in U.S. dollars, and you trade 1 mini-lot of EUR/USD. Right away we know that 1 pip of price movement is worth $1 in this trade, because you are trading 1 mini-lot of a pair which has the USD as the cross-currency (that is, a pair of the form XXX/USD). This pip-value (1 pip = $1) will not change, regardless of changes in the price of EUR/USD.

If you earn a 50-pip profit in this account, trading this pair, your dollar-profit will be $50.

If you decide to trade 1 mini-lot of USD/JPY in this same account, 1 pip will be worth $1.20, instead of $1, because the JPY is the cross-currency in this case. This pip-value (1 pip = $1.20) will fluctuate with the price of the USD/JPY.

Now, to address your question:

You should NEVER trade without knowing and controlling your RISK in every trade. In most cases, your risk in pips is defined by the price difference between your entry and your stop-loss. If you enter USD/JPY long at 0.8390 and place a stop-loss at 0.8355, then you have 35 pips of risk per mini-lot. You now know that this means a risk in dollar terms of $42 (35 pips x $1.20). You have to be able to figure this out, in order to manage risk in your trading.

Managing risk in your trading means, first of all, limiting the risk you take to a reasonable percentage of your trading capital (i.e., your account balance). What is a reasonable percentage? For a brand new newbie, such as yourself, 1% of your account balance (or even less) would be a good maximum risk per trade, to start.

Okay, so let’s say you have $5,000 in a mini-account. How much can you risk on that USD/JPY trade we were talking about? 1% of $5,000 is $50. That’s your maximum allowable risk per trade, according to the 1% rule. That means you can take the USD/JPY trade we were just talking about, where the dollar-risk is $42. But, you could not trade 2 mini-lots, because that would double your dollar-risk to $84, exceeding your $50 limit.

What if you have only $500 available for opening an account? In that case, you need to open a MICRO account or a UNIT account, instead of a mini account. With a micro account, each pip in a 1-lot EUR/USD trade is worth $0.10. And each pip in a 1-lot USD/JPY trade is worth $0.12. Therefore, you could trade 1 micro-lot of USD/JPY with a 35-pip stop-loss, and you would be risking $4.20 (35 pips x $0.12) on the trade — and this is less than 1% of your $500 account.

A UNIT account (offered by a few brokers) allows you to trade in any number of currency units — for instance, you could trade 500 units of USD/JPY, which is equal to half of a micro-lot. For very small initial account balances, this type of account is desirable. Check out Oanda, if this interests you.

4

If I may make an observation Clint… I think its a given that no one on BP answers questions so clinically or precisely than you. In fact I normally shy away from attempting to add further meaningful content! :eek:

But in this case, I’ll give it a shot. When one trades the longer TF’s… I’m thinking day and week a SL of 150’ish pips is not uncommon and therefore even at 0.01% of bal trades it amounts to 1.5% of bal per trade risked. Of course your comments stand given that most trade much smaller TF’s. Just thought it worth mentioning that conservative trading is not exclusively the domain of new traders.

5

Hello, Robert

Your point is well taken.

When it comes to longer TF trades (long-term swing trades, and especially position trades), I’ll defer to you, every time, my friend.

The longer-term trades are definitely your province, not mine. I’m strictly an intra-day trader.