Help with a School of Pipsology (Preschool) lesson

Beginner Questions
1

In the lesson: “Trading Scenario: Margin Call Level at 100% and Stop Out Level at 50%” I’m stuck at a point halfway through the lesson. There seems to be a discrepancy with what I’m learning in this lesson and what was taught in the previous lesson.

This is where I’m stuck. It is in the section headed “GBP/USD falls 400 pips!”, and it is in the calculation of “Floating P/L”. This is what the lesson states:

Floating P/L

GBP/USD has fallen from 1.30000 to 1.26000, a difference of 400 pips.

Since you’re trading 1 standard lot, a 1 pip move equals $10.

This means that you have a Floating Loss of $4,000.

Floating P/L = (Current Price - Entry Price) x 10,000 x $X/pip

-$4,000 = (1.26000 - 1.30000) x 10,000 x $10/pip

The lesson states that you’re trading 1 standard lot (i.e. 100,000 units), yet in the calculation of the Floating P/L they multiplied by 10,000 (instead of by 100,000) and I don’t understand why. My understanding of it is that multiplying by 10,000 implies 1mini lot. Multiplying by 10,000 provides the correct answer but I don’t follow why that number was used. Any help would be greatly appreciated!

Later in the same lesson, in the section headed “GBP/USD drops another 290 pips!”, again in the calculation of “Floating P/L”, they multiplied by 10,000, though, two lines prior to the calculation it stated that they were trading 1 standard lot. An explanation of why 10,000 was used in the multiplication will help me to understand why it was used where I’m stuck.

In the earlier lesson “Trading Scenario: Margin Call Level at 100% and No Separate Stop Out Level” where we were trading 1 mini lot, 10,000 was used in calculating the “Floating P/L” in the section headed “EUR/USD drops 500 pips!” and I followed the logic (as well as the math) of why it was used.

HELP!

Thanks.

Izzy

2

The multiplier (10,000) in the equation above does not refer to position-size (std. lot, mini-lot, etc.).
It converts pips to whole numbers.

Notice that 1.26000 - 1.30000 = - 0.04 (a price difference)

Multiplying - 0.04 times 10,000 yields - 400 pips (a whole number).

Then, - 400 pips x $10/pip (the pip-value for standard lots) = - $4,000 (the loss calculated in the lesson)

(Take note of the minus-signs designating loss amounts.)

1 Like
3

Hi Clint,

Thanks for your response. I follow the math in the equation. My problem is that I don’t understand why they multiplied by 10,000 in the equation. It says that we’re trading 1 STANDARD lot, so shouldn’t we be multiplying by 100,000 instead. I realize that multiplying by 100,000 will give an answer of $40,000, but shouldn’t we be multiplying by 100,000 if we’re trading 1 STANDARD lot? In the earlier lesson that I referred to we were trading 1 MINI lot and we multiplied by 10,000 in the calculation of Floating P/L. I follow the logic and the math of multiplying by 10,000 when we’re trading 1 MINI lot. Here we’re trading 1 STANDARD lot and we’re still multiplying by 10,000, and I don’t understand why. Is/are there some other factor(s) that I’m overlooking? I would greatly appreciate if you could help me to clear this up so that I can continue with the lesson. Thanks again for your prompt response.

4

Hi Clint,

Sorry, my bad, somehow I missed the first couple of lines of your explanation:

The multiplier (10,000) in the equation above does not refer to position-size (std. lot, mini-lot, etc.).
It converts pips to whole numbers.

Is there somewhere that I can get background information on how to convert pips to whole numbers as I don’t fully understand that? Can you send me a link to that information? There was nothing to indicate that that was the reason that 10,000 was used in the calculation. For the benefit of future students who may fall into the same trap that I did, could the lesson be modified to include that explanation, or could a link be provided at that point with an explanation of why 10,000 was used in the calculation? There is a similar calculation further along in the same lesson where I’ll apply this process, and I’ll be on the lookout for similar situations in the future. I may have to call upon your expertise again some time in the future as this subject is new to me. Thanks again for your assistance in this matter.

Izzy

5

Hello Izzy,

If you understand forex pricing, and if you understand what a pip is, then the relationship between the two should be obvious.

Consider this hypothetical example: You go short at 1.25000 with a TP (a pending order to take profit) at 1.24500. Your TP is hit, and you say that you earned 50 pips.

The price changed (to your advantage) as follows: 1.25000 - 1.24500 = 0.00500

Why did you refer to 0.00500 as “50 pips” ? Because you have learned that the fourth decimal place in a price (EXCEPT in yen pairs) represents 1 pip, the third decimal place represents tens of pips, the second decimal place represents hundreds of pips, etc.

In your head, you multiplied the price change in your successful short trade by 10,000 to arrive at the statement “I earned 50 pips.”

You may not have been aware that it took a multiplication by 10,000 in order to represent a price change of 0.00500 as 50 pips — but, from now on, you should be aware of that.

In any forex price (except prices in yen pairs), the fourth decimal place represents 1 pip, and one pip is 1/10,000 of a unit of quote currency. Why? Because the fourth decimal place in any decimal number represents 1/10,000 of that number.

In yen pairs, JPY is always the quote currency (there are no pairs in which JPY is the base currency). In yen pairs, the SECOND decimal place represents 1 pip, and one pip is 1/100 of a unit of JPY (the quote currency). Why? Because the second decimal place in any decimal number represents 1/100 of that number.

  • So, if GBP/USD = 1.25560, the numeral 6 in the fourth decimal place represents 6 / 10,000 of one U.S. dollar. If you multiply that GBP/USD price by 10,000, you could actually say that the price of one GBP is 12,556 USD pips.
  • If EUR/GBP = 0.88420, the numeral 2 in the fourth decimal place represents 4 / 10,000 of one British pound sterling. If you multiply that EUR/GBP price by 10,000, you could actually say that the price of one EUR is 8,842 GBP pips.
  • And if USD/JPY = 107.840, the numeral 4 in the SECOND decimal place represents 4 / 100 of one Japanese yen. If you multiply that USD/JPY price by 100, you could actually say that the price of one USD is 10,784 JPY pips.

You are right. The writer of the lesson assumed that you know what I explained, above.

That’s not for me to say. I’m not part of Babypips, except as a simple member of this forum, like yourself. I just butt in here, from time to time, when I think I can clear up some confusion.

If you want to pursue a clarification in the Babypips lesson, you should start by posting your suggestion in the Community Feedback portion of the forum —

6

Hi Clint,

I appreciate your persistence in trying to get me to understand this subject matter. As I’m new to FX trading it is taking a while to organize the details in my mind. I’ve been looking at a change in price as simply a process of subtraction. The alternative of multiplying the decimal value by 10,000 just never occurred to me. I vaguely remembered that 1 pip was 1/10,000 of the number, but didn’t appreciate the significance of that fact until you pointed it out, and where it could/should be applied. I will certainly remember it now. Thank you for your patience and your detailed explanation.

Izzy

7

@izzy153 I had also found this a little confusing when I began learning forex trading. Also, most brokers provide a 5th decimal number representing the Pipettes and that used to totally throw me off. I have since set my trading software to show only 4 decimal places. For the Yen I use 3 decimal places even though 2 represent the pips and the 3rd the Pipette. You may wish to configure your software similarly.

8

Thanks for the suggestions, QuadPip.