�We made 100 pips!� what does this mean exactly?

[szbu]

I have read across a few times like �We made 100 pips!�. To a newbie it is not very intuitive. I ran through following analysis to understand the significant of.

The pip is how we measure our profit or loss.
A pip is the last decimal place of a quotation.

1 pip = .0001 for the most of pairs. 1 pip USDJPY = .01
pip_value = pip /exchange_rate

use USD/JPY as example.
exchange_rate = 115.20
pip_value = .01/115.20 = .0000868

pips x (pip_value) x lot_size = profit/loss

Standard Size Lot
1 lot = $100,000
Mini lot size $10,000

Consider the standard size lot $100,000
What is the value per pip for the standard size lot?
(.01/115.20)x$100,000 = $8.68 per pip

if the exchange moves 50 pips up/down, the profit/loss for a lot will be $50 x 8.68 = $434.02

For an 1% margin account (1:100), the profit/loss = 43.4%

If the exchange moved 100 pips, the profit/loss would be $100x8.68 = $868.05, a 86.8%

According the pipsbaby the most of the successful FOREX traders use 1:5 or less leverages.

Do the math for moving 50 pips case:
for 1:5, to control $100,000 would need $20,000. the profit/loss = 2.1%
for 1:3, to control $100,000 would need $33,333, the profit/loss = 1.3%

For the case, moving 100 pips
for 1:5, the profit/loss=4.2%
for 1:3, the profit/loss=2.6%

A few observations:

1. To trade FOREX requires a sizable account for staying in the game. For 1:5, a standard size lot needs an over $20,000 account And for 1:3 an over $33,333 account.
2. on the profit, since you need the amount of �equity� greater than �used margin� to avoid the margin call, the profit is less than shown which not even having the spread counted.
3. pip-value = pip /exchange-rate, the larger exchange-rate and the less pip-value, therefore the less profit/loss becomes. This may be included as one of the factors as choosing pairs to trade.
4. moving 100 pips is equivalent about .85% change in USDJPY, which is less than 1 %! In 1:5 leverage, it could result 4.2% profit/loss. That�s why 90% do not make it because of lack of understanding how the leverage works.

Please comment.

Sean

[daydreamer65]

Hi Sean

At the moment I would not worry too much about the
math of a pip, in time it will all become clear. Suffice to
say all traders talk in pips, if we said we made $500, $50,
etc. it would not mean a great deal, is that 10 pips, 100 pips,
1000 pips?

Also if you take leverage at 20:1 or 50:1 you will not go far wrong.

When you get into a demo account & start making mistakes it
will all work itself out.

I have put a market order attachment with this post, it is from
my broker Oanda, as you can see I have put in 100 000 units which
is 1 lot, this then shows how much each pip is worth.
Also if you put a stop loss & take profit in, it also tells you how much
profit or loss you can expect.
Also margin used & size of the trade.

Plus if you put the wrong figures in it tells you.

Simple really.

:wishes:

[szbu]

Hello Dayfreamer,
Thanks for your reply. I will do the demo account as soon as can.

Also if you take leverage at 20:1 or 50:1 you will not go far wrong.

This is a bit of a surprise to me, because most of the experts are using 5:1 or less from I read, and in yours shown in the attachment, the leverage was about 7:1

TIA

Sean

[rhodytrader]

A few observations:

1. To trade FOREX requires a sizable account for staying in the game. For 1:5, a standard size lot needs an over $20,000 account And for 1:3 an over $33,333 account.

Fortunately, you can trade mini and micro lots, and at least one broker has no lot structure at all.

2. on the profit, since you need the amount of �equity� greater than �used margin� to avoid the margin call, the profit is less than shown which not even having the spread counted.

When one talks about final trade profit (“I made 100 pips”) that means entry to exit. The spread is handled within the trade so would not have to otherwise accounted for when viewing final profitabilty.

As for discussing profitability, doing so properly means measuring return against total account value, not just margin requirement, so as to account for risk taken.

3. pip-value = pip /exchange-rate, the larger exchange-rate and the less pip-value, therefore the less profit/loss becomes. This may be included as one of the factors as choosing pairs to trade.

Pip values only change when trade value remains constant. By that I mean the pip value for a 100,000 USD/JPY or USD/CHF position will vary, but they will not for a 100,000 EUR/USD or GBP/USD (assuming a USD denominated account).

4. moving 100 pips is equivalent about .85% change in USDJPY, which is less than 1 %! In 1:5 leverage, it could result 4.2% profit/loss. That�s why 90% do not make it because of lack of understanding how the leverage works.

While lack of understanding about leverage certainly causes some early struggles for many traders, I could argue that there are numerous other elements to trading that are more responsible for folks failing.

[szbu]

Hello John,

Pip values only change when trade value remains constant. By that I mean the pip value for a 100,000 USD/JPY or USD/CHF position will vary, but they will not for a 100,000 EUR/USD or GBP/USD (assuming a USD denominated account).

pip_value = pip /exchange_rate, there are two factors, pips and exchange_rate, to determine pip_value. What the argument for the significant of the equation only is that for the pip_value per pip will be higher if lower exchange_rate chosen.

Example USDCHF 1.2033 vs. USDCAD 1.0570
The pipe_value per pip of USDCHF is lower than USCAD’s.

[rhodytrader]

Hello John,

pip_value = pip /exchange_rate, there are two factors, pips and exchange_rate, to determine pip_value. What the argument for the significant of the equation only is that for the pip_value per pip will be higher if lower exchange_rate chosen.

Example USDCHF 1.2033 vs. USDCAD 1.0570
The pipe_value per pip of USDCHF is lower than USCAD’s.

That is correct as far as it goes, but you are talking about fixed position values. No matter what, the USD value of a USD based pair stays the same and pip values change based on the exchange rate. When you are talking about a pair where USD is the quote currency and not the base, the pip value stays the same, but the position value changes.

The pip value for EUR/USD and GBP/USD are the same even though the latter exchange rate is much higher. They are both $10 for a full lot position.

[tonymand]

It is interesting that many people talk in pips to discuss profitability but ultimately this is entirely meaningless - you cant bank a pip!. What you want to know is what is your return on equity and what risk did you take to get it. The issue of leverage is also misleading. Undoubtedly new traders often overleverage and people who use the max available leverage on their account (which can be 400:1 with some brokers) without any back up funds are asking for a short life in this business. The leverage you have on a platform is useful for ensuring you dont have to keep too much in funds with the broker (funds which are not protected as some have found to their cost) and this allows you to keep the majority of your funds in your protected bank account. So high leverage in that sense can be useful. Ultimately the leverage you use will depend on your ability as a trader, your profitability, your willingness to tolerate drawdown, the maximum drawdown you are likely to suffer and much more. Van Tharps ‘trading your way to financial freedom’ is an excellent read in these areas