Trading Forex: Think About Pips, Not About Money

In Summary:

• Trade profits can be measured in terms of money, or pips (percentage in point, or price interest point)
• Pip-based strategies can help traders create consistent and quantitative goals

Where To Start In Forex Trading?

The forex market is the biggest financial market in the world and is a meeting place for millions of traders every day. With a daily turnover, or volume, of over $6.6 trillion, forex trading truly has it all – short-term trading, long-term investing, and all in between.

Forex, a portmanteau of foreign exchange, is the market where you trade currencies from around the world. In the forex market, you will see all these flashing quotes, large volumes, and quickly moving price charts.

Essentially, forex trading is the act of buying one currency and selling the other as they move in pairs. For example, a simple EUR/USD trade would be to buy the euro as you sell the dollar. In the end, you expect to make money from your trades. Along the way, however, you have to make sure your approach is correct.

This said, it is especially important for you to have the right perspective when going into forex trading. Experts say you should think about pips, not about the money you can make from any trade. Let’s see why.

Difference Between Pips And Money

In forex trading, it matters what you focus on. You could either focus on money, or you could focus on pips. If you make the first one your goal it is possible that you will miss the point, in this case, the pip. So, what exactly is a pip?

For its part, a pip (percentage in point, or price interest point) is the smallest unit that measures the change in the rate of any currency pair. If the EUR/USD is trading at 1.1590, a single pip would move the pair to 1.1591. In other words, that 0.0001 is one pip.

A pip is usually the final decimal place of a price quote. The EUR/USD has four decimal places. For the USD/JPY a pip would be 0.01, because it trades with two decimal places like 115.50.

Money, on the other hand, comes only when you have reaped a fair number of pips and pocketed the gains. What this means is, when you trade, you see pips moving either in your direction or against. Therefore, it pays to focus on pips, not on money.

Why You Should Measure Success in Pips?

Think of pips as the best way to measure your trading success. Once you do this, strategists say, you will gain a tremendous advantage over the forex market. In more detail, when you go into the market, you want to have a clear view of how many pips you expect to make from a trade. Only then can you convert them to money and see how much you’re looking to gain. While a single pip may seem like a small amount, currencies move quite a lot relative to other assets like stocks and commodities. If you get your trading position right, you are likely to win handsome profits as your pips pile into your trade.

How To Design A Pip-Based Strategy?

It may sound fairly easy to go in the market, open a forex trade, and watch your account grow. In reality, however, it’s more complicated than it looks. And one way to do it, experts say, it to design a pip-based trading strategy. This means you stay focused on pips as a tool to make money. In other words, when you open your trade, don’t think about how much money you can make, but how many pips you expect the pair to add in or lose out. By doing so, your main job would be to accumulate as many pips as possible, regardless of the direction of your position.

An Example Of A Pip-Based Trade

To better understand this, let’s give an example:

You have $10,000 in your account and you’re looking to open a short position in USD/CHF so you can profit from the decline. You decide to open a position with 5% from your equity, or $500. If you use leverage of 100:1, your position will be worth $50,000. Now, what matters is not how much money you put on a trade, but what the value of a single pip is. In this case, one pip is worth roughly $5. That means for every pip up or down, your account also moves up or down by $5. A 100-pip move, on that note, will get you $500.

If this seems like too much or too little, you can play around with the value of a single pip as you adjust your investment. By using pip-based trading, you can position your trade in time and expect to ride out a certain move. It works the same way if you’re looking to buy into a currency pair.

Put Pips First And Money Will Follow

With the above examples, it’s fair to say that if you let pips lead your trades, money will follow. Therefore, evaluating your trading success could be done through looking at how many pips you’ve made. Once you set up a trading strategy focused on the value of a single pip, you can be flexible when it comes to profits and losses. You can decide to let your profits run, or cut your losses early if the trade turns against you.

How To Create A Winning Portfolio

The way toward a successful trading experience is paved with thousands of green pips stacked neatly in your portfolio. To this end, traders and investors in the forex market must carefully select their currency trades in order to win in the market. In that context, you should always consider how many pips you can make in a trade, and how many you are willing to risk. While there is a lot more to a successful trading strategy, if you get your pip game right, you massively improve your chances of success.

Summary

In conclusion, be sure to always pay attention to pips first, and the money will follow. It’s also important to note that even the best traders with the best setups lose money in the market. All you can do is position your trading so that you could take the least amount of risk possible, measured in pips, and also to take the largest upside in any trade you open, also measured in pips. Follow these tips and for sure you will be on the way to master the techniques and know how to become your own boss with forex trading.