Hi guys I just joined this website about two days ago and day by day I am trying to get hold of this but I cant lie to you at some points I feel like my heads about to explode I am dyslexic so I try my hardest on certain things. For example the link I just put up is really confusing to me. The section on how to Calculate the Value of a Pip is something I am really struggling on if anyone could pleaseeeee help me out in a way a 8 years old could understand that would be really helpful.
Ok mate
Let me explain this so an 8 Year old can understand.
and FOR THE RECORD, i have explained this to an 11 year old and a 13 year old… so let’s try 8 Year old.
Ok,
Firstly… the reason why you are confused about WHAT IS A PIP is because there is a lot of confusion on it in forex.
Just remember that for now, and clear your mind of everything else that you know… ok
Next. There are only 2 things you need to know.
- What is a Pip
- What is a Point
that’s it
Now… you’ll hear the term PIPPETTE
a Pippette is a POINT… it’s the same thing
so I’m going to explain PIPS to you , and POINTS
Next…
You know how in school, you have a Ruler and on the ruler you have Centimetres
and then you have mm millimetres… right
so… You have 1cm…2cm…3cm…4cm…5cm… etc… right
Now if we look at PIPS as Centimeters FROM THIS POINT OF VIEW
if i said to you i have piece of wood that is 4cm long and i cut off 1cm
how many centimetres do you have
ANSWER - 3cm RIGHT
the same thing can be said about pips
if i enter the FOREX MARKET
oh… by the way FOREX MARKET (as far as you are concerned … MEANS… THE TRADE)
so if i enter the TRADE at a certain price (Whatever it may be) and it goes up by 5 pips
I have made a profit of 5 pips (i’m not going to confuse you with pip spread as yet… we’ll get to that)
Now… if the price drops again by 1 pip
HOW MANY PIPS AM I IN PROFIT NOW…
ANSWER - 4 Pips… right
it’s that easy…
Now… NEXT POINT
Let’s take it up a notch
WHAT IS A CENTIMETRE what is LITRE what is a GRAM etc
ANSWER : They are all UNITS OF MEASURMENT
simpler Explanation - They are things that we called UNITS and we used them to MEASURE STUFF
UNIT Means 1
and when we say “what is the UNIT OF MEASUREMENT for WEIGHT”
it means… what is THE SMALLEST UNIT (The Smallest thing) that measures Weigh
the answer is GRAMS
a quick side note (and technically speaking this is both high school mathematics and later emphasized in Uni Engineering courses)
You have UNITS such as
Gram
Litre
Metre
bit
Watt
Joule
etc…
and then you have ORDERS OF MAGNITUDE
it’s just a fancy way of saying LEVELS UP OR DOWN
so you have a starting point which is usually 1
and for each level you go up, you add 1,000
the chart looks like this
1,000,000,000 (Giga)
1,000,000 (Mega)
1,000 (Kilo)
1 (Unit)
you can also go the other way but i won’t confuse you
MY POINT WAS
You have UNITS OF MEASUREMENT and ORDERS OF MAGNITUDE
so when i ask someone, What is WEIGHT measured in
if they say KILOGRAMS, that’s incorrect
because
GRAMS is the unit
KILO is the order of magnitude that dictates that you have 1,000 GRAMS
GOT THAT
now let’s get back to pips
SO UNITS OF MEASUREMENT… UNITS OF MEASUREMENT … UNITS OF MEASUREMENT
repeat that until it sticks
now… WHAT IS THE UNIT OF MEASUREMENT OF CURRENCY
ANSWER : It depends on what country you are in… right ?
so in Australia, it’s AUD
in American is USD and so on
HERE IS WHY WE USE PIPS (Before i actually explain it)
- Every price you come across will be BASED ON UNITED STATES DOLLARS (USD)
now, if you are in England for example. and you are trading USD JPY
There is a conversion that needs to take place EVERY SECOND OR LESS
now. that’s a bloody headache to say the least
and what if you have 6 different charts open all from different countries that need to convert the prices back to Pounds.
it’s a nightmate
SO THEY SAID AT ONE POINT
LET’S MAKE A STANDARD THAT THE WORLD USES WHILE TRADING AND LATER WHEN THE TRADE CLOSES WE CAN BOTHER WITH CONVERTING IT BACK TO LOCAL CURRENCY
so WHAT IS A PIP
it stands for PRICE IN POINT
what it is is… IT MEASURES PRICE ACTION (Price Action Means… The Movement of Price)
you know how you would watch the price of a PS4 be say around $500 then in a few months you would watch it go up and then back down again… THAT’S THE PRICE ACTION OF A PS4… got it ?
ok
so A PIP CREATES AN EASY TO USE STANDARD WHILE TRADING
NOW…
HOW MUCH IS A PIP WORTH
well. first , let’s look at A POINT
go back to Centimetres
now let’s look at millimetres
so you have 10 mm to 1 cm right
well… same thing here
You have 10 POINTS to 1 PIP
let me give you a visual example on a chart ok
let’s say i want to find HOW MANY PIPS WAS THE CANDLE IN THE YELLOW RECTANGLE
right… that’s a fair call
Ok let me remove the rectangle and show you 2 ways to work it out
OH… FYI… this is EUR USD (so Currency) remember that when dealing with commodities indexes and japanese yen it may be a little different
but i’m just showing you this to prove a point.
ok so now we have these 2 red lines
Top of the candle and bottom of the candle
METHOD 1. You can calculate it using basic arithmetic
What you need
- The price at the top of the candle
- The price at the bottom of the candle
and the way you work it out is
TOP PRICE minus THE BOTTOM PRICE = THE PIP DIFFERENCE
let’ look closer at the prices (THIS IS THE PART THAT CONFUSES YOU)
HERE IS THE TOP CANDLE PRICE = 1.19406
HERE IS THE BOTTOM CANDLE PRICE = 1.19285
What you now need to understand is this
let’s also look at the price on the chart
can you see how regardless of whether you look at the SELL or BUY price
can you see how there is a 1
then a point .
then 4 big numbers
then 1 small number
well… THE BIG NUMBERS ARE PIPS (Like Centimetres)
the small number is the POINT or PIPPETTE (Like Millimetres)
so if we take our candle and we have this
HERE IS THE TOP CANDLE PRICE = 1.19406
HERE IS THE BOTTOM CANDLE PRICE = 1.19285
let’s just do the calculation STRAIGHT OUT
so
1.19406 -
1.19285
0.00121
so what does that mean
well
0.00 (you can ignore this)
Just look at the 121
Now it’s 121 Pips or Points
now look at this
this price … 1.19406 has 5 numbers after the decimal point
so we call it TO 5 DECIMAL PLACES
if we look at this number IN POINTS, (like millimetres) we look at it to 5 Decimal Places
if we look at in pips, BECAUSE THERE ARE 10 POINTS TO A PIP
WE KNOCK OFF THE LAST NUMBER
so we have 1.1940
does that make sense
so if you do the calculation again… IN POINTS
IT’S LIKE THIS
1.19406 -
1.19285
0.00121
BUT… IN PIPS it would be like this
1.1940 -
1.1928
0.0012
or you could just make it easier and do this
40 -
28
12
that’s the rough answer
the accurate answer is this
1.19406 -
1.19285
0.00121
it means 12.1 Pips
because you could simply it like this
40.6 -
28.5
12.1
does that make sense ?
and that’s why the little number is little. because it’s a POINT (it’s 1/10th of a pip)
so if the price is 1.1940 and it moves UP exactly one pip
the new price would be1.1941
to be more specific, if we are talking in points it means
the original price was 1.19400
and it moved exactly one pip to 1.19410
this is 1 pip or 10 points
but if the price is this… 1.19406
and it moves EXACTLY 1 pips the new price would be 1.19416
because 406 + 10 = 416
does that make sense
NOW THIS METHOD OF CALCULATION ONLY WORKS ON INSTRUMENTS THAT HAVE 5 Decimal places (Which is most of them)
METHOD 2 : The easy way… Using the cross hair
let’s go back to our chart
let’s get the cross hair out and measure from the top to the bottom of the candle
ok, this is how you read the cross hair
we have 3 numbers
2 / 125 / 1.19409
The number to the right (the big number 1.19409)
IS THE PRICE AT THE POINT WHERE THE CROSS IS ON THE CROSS HAIR
The left number is … HOW MANY CANDLE BACK YOU ARE
so… if you put the cross hair on a candle anywhere and you drag it back and want to know how many candle are 40 candles… keep draggin it until the number reads 40
THE MIDDLE PRICE IS THE AMOUNT OF POINTS the candle is
so in this case it says 125
THIS MEANS 12.5 PIPS
THIS IS ANOTHER WAY TO CALCULATE IT
so does that make sense
SUMMARY
-
A Pip is used to Measure PRICE MOVEMENT while trading
-
1 PIP = 10 Pippette’s / Points
-
When a currency is quoted to 5 decimal places, it means 5 places is measuring in POINTS
but 4 decimal places is measuring in PIPS. Just knock off the last number -
a Pip is Like a Centimetre
-
a Point is Like a Millimetre
oh… THERE IS NOTHING SMALLER THAN A POINT
there are no milli points or anything like that
A POINT IS THE SMALLEST MOVEMENT THAT PRICE IN THE MARKET CAN MAKE
NOW LET’S GET INTO SOME CALCULATIONS to Calculate the PER PIP VALUE
(Because that’s what’s important)
let’s assume you are trading United States Dollars (USD) and you live in the United states.
let’s assume you start your trading account with $1,000 USD
let’s assume you want to risk 1% of that PER TRADE
well… 1% of 1,000
is calculated like this
When you see the word OF you put X (Multiply)
you put it in your calculator like this
0.01 = 1%
0.10 = 10%
1.00 = 100%
so
0.01 x 1000 = $10
or the easy way is… Just knock off 2 zero’s
Point is… you are risking $10 in the trade
Now here is the mistake that everyone makes
the just jump in and select any lot size… THAT’S STUPID… don’t do that
CALCULATE THE LOT SIZE
and in order to do that
YOU NEED TO KNOW WHERE YOU ARE GOING TO PUT YOUR STOP LOSS
because
Your stop loss is YOUR RISK
because if the price hits your stop loss… YOU LOST THAT AMOUNT OF MONEY… got it
so let’s do a real trade ok
let’s calculate it
NOTE :
Yellow Line = Your Entry Price = 1.19340 POINTS or 1.1934 PIPS
Blue Line = Your TAKE PROFIT Price = 1.19450 POINTS or 1.1945 PIPS
Red Line = Your STOP LOSS Price = 1.19260 POINTS or 1.1926 PIPS
so it means this…
from your entry which we will look at as 1934 because we really don’t care about the 1 at the beginning because we know that 1.0 - 1.0 = 0.0 so we can ignore it until the price gets to 2.00000
so the entry is 1934
you want to take profit at 1945
so… 1945 - 1934 = 11 PIPS
Now. that doesnt’ mean anything in dollars and cents until you know
THE LOT SIZE
and
THE VALUE PER PIP or COST PER PIP
now. THE DREADED STOP LOSS
Your Entry is at 1934 and your stop loss is at 1926
which means
1934 - 1926 = 8 pips
so BASICALLY
you have a Stop Loss to Lose 8 Pips Potentially
and if you win you will take profit of 11 Pips
THERE YOU GO
Now… IN ORDER TO PLACE THE TRADE YOU NEED TO KNOW YOUR LOT SIZE
this is how it works
0.01 Lots = 10 cents per pip (this is the minimum you can trade)
0.10 Lots = $1 Per Pip (Be Careful when trading this size)
1.00 Lots = $10 Per Pip (if you are trading this size you should have a lot of experience)
10.0 Lots = $100 Per pip (if you are trading this size, you are either ridiculously stupid and will be broke soon, or you are a successful trader)
THAT’S THE GENERAL RULE OF THUMB that we use to calculate other lot sizes
Now THE MAIN POINT HERE IS THIS
YOU MUST NOT SPEND MORE THAN $10 IN THE WHOLE TRADE
you see, a newbie will assume that 1% Risk is $10
and then put a trade down for 1.0 Lot ($10 Per Pip) and then wonder why they lost
PAY CAREFUL ATTENTION NOW
your Stop loss is 8 Pips away… right
so THAT $10 NEEDS TO BE DIVIDED OVER THE 8 pips
so now. we do this
$10 divided by 8 = $1.25
THIS IS YOUR COST PER PIP
BUT THERE’S ONE MORE CATCH IN THE REAL WORLD
You need to calculate your PIP SPREAD
but before i get into that
DO YOU UNDERSTAND HOW… $1.25 is THE COST PER PIP aka The Value of 1 pip
in this trade
if not… READ IT AGAIN or ask
IF YOU DO … Read on
Now understand this
You only have $10 for the trade
and if you divided it 8 times you get $1.25
but what if you had a stop loss of 40 pips
well
$10 Divided by 40 pips = 0.25 (25 cents)
so lets’ now compare these 2 scenario’s
THE DANGER IN FOREX
if your value per pip is $1.25 you will choose a lot size of 0.12 Lots
because
$1.25 = 0.125 LOTS
but, you can only go to 2 decimal places. and it’s best to round down not up
so you will trade 0.12 LOTS
because
0.10 Lots = $1 +
0.01 Lots = 10 cents
so… 0.02 = 20 cents
so… 0.10 + 0.02 = 0.12 LOTS
so YOU ARE NOW TRADING WITH $1.20 per pip… 0.12 lots
now let’s say the trade goes against you and you have a stop loss at 8 pips
- IF IT GETS HIT… you’re ok. You only lose $10 total
- BUT, IF YOU NOW MOVE YOUR STOP LOSS DOWN TO 40 PIPS because you freaked out
and you thought price would turn around
LET’S DO THAT CALCULATION
Remember, You have PLANNED TO LOSE $10
let’s see what you lose…
$1.20 per pip x 40 pips = $48
so … You now lost almost 5 times more than what you planned
THIS IS NOT GOOD
so the point is
STICK TO THE ORIGINAL PLAN so you don’t blow out your account
THAT’S THE LESSON ON HOW TO CALCULATE THE VALUE OF A PIP
and understand the difference between a point and pip
THE LAST THING YOU NEED TO KNOW IS THIS
if your Take Profit is at 11 Pips
and Your Stop loss is at 8 pips
YOU NEED TO CALCULATE FOR THE PIP SPREAD
Look at this
EURSUD right now
The prip Spread is the Difference between the Buy and sell. or the ASK and the BID same thing
it’s the difference between the 2 prices SIMPLY STATED
so here
the SELL is 1.19324 (always do this in points)
the BUY is 1.19325
if we minus them… we get a difference of 0.00001
so… 1 Poin
which is 0.1 PIPS
tha’ts not much
let’s say the pip spread was 3 Pips… ok
this would mean that
- IF YOU PLANNED TO HAVE A TAKE PROFIT OF 10 PIPS. you should calculate for 13 Pips
- IF YOU PLANNED TO HAVE A STOP LOSS of 8 Pips, you should calculate for 5 Pips
Point is… Account 3 pips in your calculation
if you don’t understand this.
DO THIS
go on your chart
right click
select PROPERTIES
AND YOU’LL SEE THIS
Make sure that the SHOW ASK LINE is checked
and you’ll understand that when the 2 lines go further apart this spread is bigger
also pay attention to which line hits your take profit or stop loss when it does
AND YOU’LL UNDERSTAND WHAT I MEAN
ok mate, that’s it
DID YOU UNDERSTAND ALL THAT
LET ME KNOW ?
also, can i ask
WHAT ARE YOU DOING TRADING WHEN YOUR ONLY 8
I MEAN… KUDOS FOR WANTING TO KNOW THE MATH… good on you, it shows you’re not an idiot.
and that’s why i explained this to you , because i respect your will to learn.
but You can’t trade when you’re 8
so… What exactly are you doing
and you won’t understand how economies work at your age
so… again… what the hell are you doing hehe
2 Likes
If that doesn’t put him off trading, nothing will.
Abz360, just go to the free babypips school and learn how to trade
Namaste
2 Likes
To simplify what our patronizing friend has said so a 8 year old can understand think of a pip like this
" 1 pip is equal to 1/100 of a cent "
9 words might be a record!!!
Say what you mean, mean what you say aye Marty
1 Like
Is somebody paying that guy by the word?
2 Likes
@eddieb[quote=“eddieb, post:3, topic:127357, full:true”]
If that doesn’t put him off trading, nothing will.
Abz360, just go to the free babypips school and learn how to trade
Namaste
[/quote]
LOL
Well mate, No one said trading was easy
and , i think what he meant was , he’s already been to babypips school and still doesn’t get it
but then again… HE’S 8
so… Yeah hehe
Not really expecting him to understand economics at this point
and if he doesn’t understand what a standard deviation is or a MEAN AVERAGE, i might forgive him for it.
Who does and how is that gonna help?
And can’t remember the last time the markets respected any form of mathematical formula
But we forgive you bro. I forgive you.
Flagged LOL
Yes that is quite correct and a “Lot” is worth $10 per pip - that is what you are gambling.
So a “mini lot” is worth $1 per pip and a “Micro-lot” is a gamble of $0.10 per pip.
That is completely true for ***USD pairs and is approximately true for the other pairs.