Forex: Pips Explained.

Currencies are ‘traded’ in ‘pairs’, one against the other. As one of the pair goes up in value, the other comes down or vice versa. This movement is recorded in decimals - each decimal is called a ‘Pip’. Here’s an example of how the decimals are written 1.7523. The difference between 1.7523 and 1.7524 is one ‘pip’.

The Great British Pound and the US Dollar are a ‘pair’ - written like this GBP/USD. A currency value in this currency ‘pair’ might look like this 1.7523. (1.7523 dollars to one GBP). The difference between 1.7524 and 1.7424 is one hundred pips - in this instance the dollar went down 100 pips, from 1.7524 dollars to the pound - to 1.7424 dollars to the pound.

If the GBP moves up 5 ‘pips’ - this means that the USD has gone down 5 ‘pips’. It is not uncommon for any ‘pair’ to move 100 ‘pips’ in a trading day. Here’s an example of a five-pip-movement up, in the GBP/USD, from 1.7523 to 1.7528.

When we ‘Enter’ a ‘trade’, we can put any value we like on a ‘pip’ from 10 cents to hun-dreds of dollars. If we chose to trade with ‘pips’ valued at $10 and our ‘trade’ moved up 5 ‘pips’ - the profit would be $50.(5 pips x $10 = $50)

If instead we chose to ‘trade’ with ‘pips’ valued at $1 and our ‘trade’ moved up 5 ‘pips’ - the profit would be $5 (5 pips x $1 = $5). So, if we wanted to ‘trade’ at $50 a ‘pip’ and the price moved up 10 ‘pips’, we would gain $500. The more value we place on a ‘pip’, the more each ‘pip’ movement is worth - we are leveraging ‘pip’ value against ‘pip’ move-ment.

‘Buy’ trades are easy to understand. We buy something at a certain price - the price rises, we sell it for more than we paid - we made a profit. But if we forget about ‘buying’ and ‘selling’ and use the words ‘Enter’ and ‘Exit’ - it will be much less confusing.

In a ‘Buy’ trade. We ‘Enter’ the trade at a certain level. The price rises and we ‘Exit’ the trade. The difference between the ‘Enter’ price and the ‘Exit’ price is our profit.

Entering a ‘Sell’ trade, we ‘Enter’ the trade at a certain level. The price falls and we ‘Exit’ the trade. The difference between the ‘Enter’ price and the ‘Exit’ price is our profit.

With Forex trading, we make money whether the market is rising or falling by choosing to ‘Enter’ either a ‘Buy’ trade or a ‘Sell’ trade.

We choose two things when we enter a trade.
1. We chose either a ‘Buy’ trade or a ‘Sell’ trade.
2. We chose the value (in money) we want each ‘pip’ to be worth.

When we enter a ‘Buy’ trade, we want the currency to rise in price. In a ‘Sell’ trade, we want the currency to fall in price.

If things go against us, we can exit the trade manually at any point. We can also preset a ‘Stop-Loss’ which will exit the trade automatically. The Stop-Loss is a ‘safety-net’ which automatically limits losses.

Pretty easy stuff once you get to grips with it.

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