Greetings traders and welcome back.
Thank you for joining me for another "In Depth with Chris"
episode. That's me.
Today, we are going to be covering:
What is a pip? As you work your way into the trading world,
or work your way around any trading Forex forums out there,
you'll hear traders often say "pip".
It's spelled P-I-P. It's something that represents a measurement,
but what no one ever really talks about what that measurement is.
Today, we're going to cover all of that and more, and as a matter
of fact, if you look around the charts right now, you can
see pips everywhere. Do you see him yet?
Don't worry by the end of it, you'll understand exactly what a pip is.
Let's dive on into it.
So what is a pip?
Well, by the definition P-I-P is just short for "point in percentage".
We even hear people sometimes say it stands for "price interest
point". Either one of these will be acceptable, but the core
of it is, a pip itself refers to the smallest price movement a currency pair can
make given whatever exchange rate that it's referencing. Pips
are used to reference gains and losses on a trade quite commonly,
and we can think of them almost like you would think of an inch adding up to feet.
We use the inch to measure a distance, just like we use the
pip to measure distance of a market move. Understanding their
changes in value can help traders better manage their trading strategy as well.
If we take a look at a pretty standard quote of, say, the euro
dollar, this number really isn't too far off from the present-day
value. The only difference here is we have a whole bunch
of different colors going on. But, we'll say this is the euro
dollar, which is going to look something like this on any
trading platform. Now ignore my terrible handwriting, but here we go.
What this is telling us here is one dollar is going to be
how much of a euro? Well, it's going to cost us 1.129
dollars to make one euro. That's what this is telling us.
That is the exchange rate here.
It's always the second pair, how much it takes of the second
pair to make the first pair.
If the euro dollar is 1.129, that means it takes 1.129 dollars to buy one euro.
As far as the pip goes, the pip is almost always going
to be the fourth decimal place, with a few rare exceptions like the dollar yen.
The yen is a weird exception to that rule, but we'll get
into that in a little bit. Nonetheless, this is what we're looking at here.
The PIP is going to be this measurement here where we're
seeing four decimal places out. That's one, two, three, and four.
The seven here represents the pip's place. The reason that
we have it down here saying 7 pips is because if this was
going to be a difference between 1.1290 instead of 1.1297, that is 7 pips
of difference over the zero. Bare with me here.
As we keep moving each place down, obviously, we're just
going to have simple math here
meaning, that by the time we get over here, a simple
1 at the front of the decimal is going to be equivalent
to 10,000 pips. You can see the difference here as we
work through all the different decimal places along the way.
Then finally down here at the very end, outside the pip,
there's actually something smaller, which once again, we will
get to, and that is going to be 1 pipette.
That is the smallest measure of move, and some platforms actually
don't even display this, but for the most part this is going
to be what comes after the pip place, which will usually
be, once again, the fourth decimal place.
Using the pound dollar as an example over here, if we
have a change between this 6 on the left to the 7 on the
right, this equates to price having changed 1 pip.
We have gone up 1 pip because remember, the fourth decimal
place over here and over here represents the pip.
As we increase in moves of .0001, that is going to be the
measurement of 1 pip. If it moved .0005,
well then the price would have moved five pips. In this example,
prices only moved up 1 pip.
When a trader says they made a "50 pip gain", that means
their trade, if they were going long
for example, say they bought at this price here on the left
would have gone up 50 points beginning at the 6 and going
this way over here when the trade was all said and done.
The value of that is going to be determined by the value
of that individual pip based on the exchange of which they're trading.
Which brings us to our next subject: The value.
So what is the value of a pip? How do we figure it out?
Well, in any given Forex trading position, the pip value refers
to the change in value following a 1 pip movement in the
relevant foreign exchange rate.
It's essentially the price attributed to a 1 pip move in
a trade, and used to reference the gains or losses incurred on that position.
The currency pair being traded, the size of the trade, and the exchange
at the time of trading all influence the value of that particular pip.
Next comes everyone's favorite part: The calculations.
Now don't panic too much,
usually you won't have to calculate pip values yourself, as
most of the Forex brokers or platforms will do it for you.
There are also several pip calculators available out there for you online as well
if you just throw a quick Google search in. So don't worry
about exerting your brain too hard, or get any headaches and
you don't have to yell at your dog. Nonetheless, calculating
pips is still useful to be aware of exactly how it's done.
So we are going to cover it.
To calculate pip value: We're just going to take 1 pip, which is obviously 0.0001,
and multiply it by the trade size or number of base units
being traded, which we refer to as a "lot". Then we'll divide
the figure by the current market value of the currency pair.
So the equation will look something like the pip value is
equal to (decimal place pip times the trade size), all over the exchange rate.
This means that pip values will differ between currency pairs
since there will always be variations in exchange rates.
If the quote currency is the U.S. dollar,
however, the pip value remains the same. A standard lot size
of 100,000 equals a pip value of $10, which is our 0.0001 times 100,000.
Let's say we're trading the dollar CAD, which is the USD/CAD
for those of you that are unfamiliar. In a dollar account,
we would simply divide the pip value for a standard
lot, which we know that standard lot is $10, by the dollar CAD rate.
Let's say the dollar CAD is 1.3 at the moment. Then the pip value
amounts to, say, 769. That means $7.69 because we have $10 divided by 1.3.
You may be thinking well hey Chris, don't be an ignorant American,
what if I'm not using a dollar based account?
Well, don't worry, I've got an answer for you.
The thing is, that pip values are typically fixed when
the currency the account is funded with is listed as the second pair.
For example, if you have a British pound account, okay, and
any pair that would say, be pound XXX, meaning pound anything
like the pound dollar as an example, that will have a fixed pip value.
To calculate the pip value for a pound XXX pair,
we would divide the fixed pip rate by the exchange rate.
For example, if a British pound, Swiss franc pair had an
exchange rate of say, .855, then a pip is
worth 1170 pounds for a standard lot of 10 over 0.855.
If your trade includes the Japanese Yen, and it was say, the pound yen for instance,
the formula would be slightly different since pip movements
for the yen are measured in two decimal places.
You heard me right, the yen is two decimal places.
One of the random outliers that isn't four decimal places
for the pip. Instead, it is two. It is one of the only ones you
will probably run into, unless you're trading some really
far off outliers. For the most part, once again, the
yen is going to be two, and the most everything else will be,
four decimal places to determine pip value.
This is simple though. In this example that we were talking
about, after calculating the pip value,
we would just multiply our result by 100. That's all we have
to do. Multiplying by 100 compensates for those two missing
digits. An example of that would be if the pound yen exchange
rate was a 134.7, we would divide 10 pounds by 134.7, then multiply the result
by 100 for a pip value of 7.42 pounds. Not so bad, right?
Understanding pip value is also beneficial for helping us
calculate our position size as well because position sizing
simply refers to setting the appropriate amount of units
of whatever currency pair we're interested in buying or selling
within our comfortable risk level.
This is also referred to just simply as the lot size that we choose.
This is the way that we go about it: The first step is to decide our risk per trade.
This is the total risk we're willing to be exposed to on a single trade.
This is usually expressed as a percentage of the balance
in our trading account.
The general rule of thumb is to not risk more than 2-5%
of our account balance on a single trade.
Let's say our account balance is a 100,000. Our
risk exposure should be somewhere around say, $2,000 per trade, representing 2%.
The next step is to determine our stop loss in pips.
A stop loss is essentially an exit plan for when the market
swings against us so we don't incur more losses.
Before entering the trade, we want to place our stop loss level expressed in pips.
For instance, if we're trading the euro dollar at a potential entry price
of say, 1.2080, and we place our stop loss at 1.2030,
then we have a stop loss of 50 Pips.
Finally, we want to calculate our position's size.
The simplest way to do this is to divide our risk by our stop loss, times the pip
value. That means our position size will be equal to capital times
risk percentage portrayed, all divided by the stop loss times the pip value.
Using these figures, our position size would be something like $100,000 times 2%
divided by 50, times $10, which is equal to 2000, divided
by 500, which equals 4. That means our lot size would be 4.
Pips, pipettes, and lots, oh my!
Essentially, we've already covered what pips are,
but when we talk about pipettes, a pipette is going to simply be 1/10 of a pip.
If we know that a pip is going to be the fourth decimal
place right here, representing one pip,
well, simply put the pipette is going to be the digit that comes after that.
It's going to take ten of these guys to make one pip.
Some trading platforms do not even display the pipette, although
it is pretty common that you'll run into these on most trading platforms
so we should still discuss it. A lot of these digits
once again are going to be moving at such a quick rate that
it's not going to be overly concerning to you as a trader.
Nonetheless, it is important to be aware of all the verbiage.
Once again, just remember that the pipette is going to
represent 1/10 of a pip. It is going to be the digit that comes next after it.
We can cross off pips, we can cross off the pipette, but now
it's time to talk about what lots are, and that doesn't just
simply mean a lot of cookies or a lot of cake. It is a measure of units.
A lot refers to the number of currency units we wish to trade.
These numbers that we're looking at here are typically
fixed so if you want to enter a trade, you can buy that number
of units per trade. We have a nano lot, a micro lot, a mini
lot, and a standard. The nano lot is going to represent 100 units,
the micro lot is simply going to represent 1000, mini lot
is going to represent 10,000, and I'm sure you're already
catching on to the trend here,
the standard lot is going to represent 100,000 units.
Relatively simple, it's just going to represent another measure of units.
It's something that we're going to be able to use to say,
okay, I'm interested in a mini lot, or maybe I'm interested
in a nano lot because I am just not really feeling it today,
or maybe I'm going in and I really would like to own a bunch
of lots of standard size and really make some market moves here.
Because practice makes perfect, I've brought a couple examples for you.
Don't hate me too much for it. To give you a chance to use
some of the information that we have learned today to calculate
some of these problems on your own.
Our first one is going to be: Let's say that we traded two standard
lots on the euro dollar, and it closed at 1.1750 after gaining 60 pips in our favor.
What would our total profit be? If you need to pause the video
and skip, and go back to the beginning in order to make sure you are doing it right,
I promise you I won't know so I won't be mad. Take some
time and see if you can solve it out.
You got it? Alright.
Remember that the pip value is equal to the decimal place
pip times the trade size, divided by the exchange rate.
If the pip value is .001 times 2 times 100,000,
remember the 2 represents the two lots, all divided by the
1.1750. That's equal to 1.702 in regards to euros, or in dollars that would be $20
equals 17.02 divided by 1.1750.
To determine our profit,
we're just going to multiply the pip value by the pip movements.
That means 17.02 times 60 pips equals 1021.2 in profit,
or expressed again in dollars, that would be $20 times 60 pips equals $1200.
Let's throw a curveball in the mix, and see how you do when
we introduce a yen pair as well.
If we traded one lot on the dollar yen, and it closed
at 110.40 with a loss of 50 pips, what would the total loss from the trade be?
Remember, the yen is the one that has the pip point being
two decimal places in instead of four. Take some time and figure
it out, and we'll come back with the answer here.
The pip value would be .01 because of the second
decimal place, times 100,000, divided by 110.40, which equals 9.05 dollars.
That's 9.05 dollars times 50 pips, which equals $452.50 in losses.
If you got it, congratulations! If you didn't, keep practicing. Now we understand
what pips are, pipettes and lots, and knowing this information
can allow us to better manage our risk and correctly size
our positions, which is crucial as any trader will tell you.
When we look at a chart now, the same one that we were looking
at before we got going, we should see pips everywhere.
Let's pretend that we were to take a trade right here at
say, 1.0867, and we went long. If we got out at 1.0870, what did we gain?
Well, we gained 3 pips. With our new found knowledge, the sky's the limit.
Thank you for joining me again everybody, I do appreciate it.
As always, please make sure you click
the like and subscribe button below, and I will see you in the next one.
Thank you all, over and out.