The Value of a Pip

Hey folks! peace for you and hope you have a fruitful trading last week, week 32 of 2012. All Praises to GOD, for me, I met my profit objectives for the past 2 weeks and started to reflect what works and what don't work for me and most importantly why they work for me coz then that gives me a better understanding of myself.

Anyway, that is another story that I plan to share with you sometime, and this week I want to share with you my realization of how important it is to know the pairs we trade especially how they affect our profits and loss. Therefore I would like to share about the value of a pip.

The value of our profit and loss depends on two factors - the value of the pip on the pairs we trade and our position size. So simply the profits/loss equation would be P&L = Pair Pip Value X Position Size. Let's take a look at some examples on 3 pairs that I trade: EUR/GBP, EUR/USD, USD/JPY

For the sake of this discussion, let's use USD as our base account as most have USD account.

EUR/USD

EUR/USD is priced around 1.22xx as of this writing and that simply means to buy 1 EUR from the USD counter we need 1.22xx USD or to sell 1 EUR to the USD counter we will get 1.22xx USD. Let's use 1.2250 as an example. So let say we are to buy 10,000 EUR from the USD counter we will need (10,000 X 1.2250) = 12,250 USD and with 1:500 leverage for example we only need to put down (12,250/500) = 24.5 USD and with 1:200 leverage for example, we need to put (12,250/200) = 61.25 USD and in 1:50 leverage, we need (12,250/50) = 245 USD

Hmm..that only tell half of the story. The needed capital. How about the potential profit and losses? Well,

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EUR/GBP

EUR/GBP is priced around 0.78xx as of this writing and that simply means if we are to buy 1 EUR from the GBP counter we will need 0.78xx pence. Let's use 0.7800 as an example. So let say we are to buy 10,000 EUR from the GBP counter we will need (10,000 X 0.7800) = 7800 GBP and with 1:500 leverage for example we only need to put down (7800/500) = 15.6 GBP only! With 1:200 leverage for example, we need to put (7800/200) = 39 GBP

Now I know that not many are following faith based trading, most of us only have USD based account so how much is that in USD? To determine the value in USD, we simply multiply the GBP value to the USD counter. So if we use GBP/USD rate of 1.5670, we need (15.6 X 1.5670) about 24.44 USD in 1:500 leverage and about (39 X 1.5670) 61.11 USD in 1:200 leverage to open a 10,000 EUR/GBP position in a USD base account.

Simply said, to buy EUR/GBP, using a USD base account, a trader would incur the GBP/USD rate. So a pip, that is 0.0001 movement in the EUR/GBP pair would cost the trader 1.5670 USD in this example. In another words, this is an expensive pair to trade for a USD base account. That is why I have EUR and GBP base account.

Hmm..that only tell half of the story. The needed capital. How about the potential profit and losses?

Well, now we know that a pip movement in this pair is USD 1.5670 for a 10,000 contract size, so 30 pips profit potential with 20 pips loss potential (risk) means (30 X 1.5670) = 47.01 USD and (20 X 1.5670) = 31.34 USD respectively. For a 1,000 contract that means (30 X 0.1567) = 4.70 USD and (20 X 0.1567) = 3.13 USD respectively; and for a 100,000 contract that means (30 X 15.67) = 470 USD of profit potential with (20 X 15.67) = 313.4 USD of loss potential (risk)