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What is a Pip?

What is a Pip? A "pip" is a unit of measurement used to show changes in the rate of a pair. In the
image below, a pip is the fourth decimal.

Pips are one of the ways by which traders calculate how much profit they made or lost on a trade.
For example, if you enter a long position on GBP/USD at 1.6550 and it moves to 1.6600 by the
time you close your position you have made a 50 pip profit.

If you enter a short position at 1.6550 and the price moves up to 1.6600 you lose 50 pips.
Remember, short means you want the rate to go down. So, if you short at 1.6550 and price falls
to 1.6500, you make 50 pips profit. Below are a few more examples of trades.

Trade 1 - GBP/JPY
Long entry at 172.50
Exit at 172.87
Profit/loss = +37 pips

Trade 2 - GBP/USD
Long entry at 1.6077
Exit at 1.6007
Profit/Loss = -70 pips

Trade 3 - EUR/USD
Short entry at 1.3491
Exit at 1.3191
Profit/Loss = +300 pips

Trade 4 - USD/CAD
Short entry at 1.0863
Exit at 1.0830
Profit/Loss = +33 pips

Trade 5 - EUR/AUD
Long entry at 1.4058
Exit at 1.3058
Profit/Loss = -1000 pips
You may have noticed that in all the examples above, the pip is either in the fourth or second
decimal place. For example, on EUR/USD the pip is the fourth decimal, on GBP/JPY the pip is
the second decimal. The fourth and second decimal place are the standard in Forex. Virtually
every pair you trade will have the pip as either the fourth or second decimal.

Now that you know what a pip is, and how to calculate pip gains and losses, you may be asking
yourself "how much money is each pip worth?"

How Much is a Pip Worth?


The value of a pip changes depending on the pair you trade. Calculating the value of a pip is not
vital to your success, as a trader, since your broker will automatically calculate the value for you.
However, if you're going to trade, you should know a little about how this works.

On GBP/USD a pip is the fourth decimal place, 0.0001. So, if you enter long at 1.6400 and the
rate of GBP/USD moves up to 1.6450, you have made 50 pips, or 0.0050.

Calculating the current value of a pip is easy. Here is the simple formula:

1 pip / exchange rate = value per pip

Lets take a look at a few examples.

Lets take a look at a few examples.

USD/CHF = 1.0810

0.0001 / 1.0810 = 0.00009250


1 PIP = 0.00009250 USD

Clearly, this is not much money. However, through leverage, $0.00009250 can become
a significant amount. You will learn about leverage later.

USD/JPY = 96.27

0.01 / 96.27= 0.0001038


1 PIP = 0.0001038 USD

USD/CHF = 1.0810

0.0001 / 1.0810 = 0.00009250


1 PIP = 0.00009250 USD

In the next two examples, because the base currency is not USD, using the same
equation as above we get the value of a pip in the base currency. So for GBP/USD the
pip value will be shown in GBP not USD.
However, if you trade in USD you may want the pip value in USD. On any pair, with
USD as the quote currency, to get the pip value in USD you simply multiply the pip
value by the exchange rate:

pip value x exchange rate = pip value in USD

GBP/USD = 1.6443

0.0001/ 1.6443= 0.00006081


1 PIP = 0.00006081 GBP

0.00006081 x 1.6443 = 0.00009998 USD

This is rounded up to 0.0001 USD

EUR/USD = 1.3940

0.0001/ 1.3940= 0.00007173


1 PIP = 0.00007173 EUR

0.00007173 x 1.3940= 0.00009999 USD

This is rounded up to 0.0001 USD

You will find that all pairs with USD as the quote currency have a pip value of roughly
$0.00001 USD.

The next (and thankfully the last) example shows how to calculate the value of a pip, in
USD, for pairs that do not have USD as either the base or quote pair.

GBP/JPY = 158.80

0.01/ 158.80= 0.00006297


1 PIP = 0.00006297 GBP

This time because the quote currency is JPY, multiplying by the exchange rate will give
you the pip value in JPY. So to get this to USD you simply take the GBP/USD rate and
multiply the pip value by it.

0.00006297 x 1.6443 = 0.0001035


1 PIP = 0.0001035 USD

How boring was that? As is said above it is not vital to know this stuff. However, if you're
going to trade Forex, you might as well know how it all works.

So, what about a pipette?


In the last few years, some Forex brokers have started displaying an additional decimal
at the end of a currency pairs rate.

This additional decimal is know as a pipette, or a micro pip. A pipette is simply one tenth
of a pip. The pipette will appear as either the fifth or third decimal place in a currency
pairs rate.

If your broker displays pipettes, do not worry. You can simply ignore the pipette when
you are calculating how many pips you have made or lost on a trade.

Now, next time somebody asks you "What is a pip?" or "What is a pipette?", you can
explain it to them. Next I will teach about lots, leverage, and margin.

Leverage is risky not forex or trading.


(In lay man's term leverage how big lot you play in each trade.In general risk to your account should
not be more than 1-3% at any time..no matter how many trades you put.)

Every investment with high leverage is risky.It can be gold/silver,real estate,cattle,house or trading.
Basics of leverage is how much money you put upfront and how much money you borrow to make an
investment.

Example: (Only for people who are new to concept of leverage)


Say,you want buy a piece of land in Mumbai worth 2 million as an investment hoping the rate will go
up to 6 million in 6 years.But you have only 0.5 million money with you.So,you talk to a Banker friend
who will lend you rest of 1.5 million in return of modest return of 10%(just assume).
Suppose after end of the 6 yrs you are right and property is worth 6 million. Out of the 4 million profit
you will pay back 2 million( 1.5 million principal and 0.5 million interest) and keep the rest of 2 million
with you.

So,you invested 0.5 million and got 2.5 million.

In the other case say property price comes down by 0.2 million due to economic slow down. But,you
have to pay the loan back to the bank anyway after 6 years.
After paying interest of 0.5 million interest + loan 1.5 million,you are left with 1.8million-1.5million-
0.5= -0.2 million

Net 0.7 million loss.

Remove the interest component and apply the same to forex or any kind of option/futures trading with
leverage.(Actually there is interest component in forex called SWAP)

Forex,Futures,commodity even stocks options (Call/put) have high leverage has same degree of risk.
Forex is not different from any other kinds of investment as such.
Only thing is forex brokers allow kids to play(over leverage) with 10$ which others might not allow.

Leverage magnifies gain/loss. It is a double edge sword.


All kind of return depends on leverage so without knowing leverage any idea of assessing return is
meaningless.

What causes price to move?

Of courses,changes in demand and supply but what causes that?

1.Any news which gets most of the market by surprise ie different from what market expected.
in forex economic announcements,macro-economic news, politics

2.Change in bias in the mindset of people due to fading of memory or looking for fresh
perspective at the new price.

It is like bargain hunting. You thought potato (Pound) is overpriced at 30 so you did not buy but
when price reaches 10 you start buying feeling it is cheap

3.Manipulation by big market participants in thin market (possible in forex in asian/pre-asian


session, quite common thing in gold/silver market).

4. Unwinding of big position in thin market/ market close

1 and 2 are major factors.


3 and 4 are minor

"1.Any news which gets most of the market by surprise ie different from what market expected.
in forex economic announcements,macro-economic news, politics"
Analysis of such events and their effect on prices is called Fundamental analysis.

Let us take an example

Suppose, a grain is trading at 10 $/kg in market.You got a news from a villager that due to
lack of rain potato harvest has been spoiled.So, there will be lack of supply so prices will
go up.This news will go around and people will start buying that grain (expecting price will
go up) like crazy.Suppose after 3 days prices reach 18$/Kg.
Then a big grain dealer will asses the situation.As per his calculation, there is shortfall
of X tons of grain and price should have reached P Rs rather than 18 (from calculation
assuming some X).
He further knows that a neighbor state will export the grain and it will hit market
within Y days. So, price will fall after y days mostly.

Now, the question is how will he estimate the value of X ,Y, and P.
He will use the estimated data from the field,people and experts.---------------------
Fundamental analysis

He will ask his father about his experience when such kind of situation occurred in past to
reach value of Y and P.
Finally use his own judgement--------Technical analysis

Relationship between fundamental and technical


The key is not what is fundamental/technical analysis is.Everyone knows it.
Key is to understand the relationship between two.

As we saw in the above potato example even if he knew price will go up when he heard
the news of drought he is not sure how much it will go up.Apart from his analysis of
present data he looked for past data to estimate the future.

The bold part is the premise of technical analysis


The idea is when we observe price action we should know what are we seeing!!

PS: I am not sure why this thread was moved from trading systems to journals. Though, I
named it as live example with charts, idea was to show the strategy with some example.