What or who is a pip?

What is a pip and why exactly does it matter?

This is a post adapted from a quick post I write on my personal blog on the subject of Trade and Pips.

The whole reason for starting this blog was that I have decided that I want to become nicely Rich from trading stocks, shares and currency. As a result I have been investing a few hours of my time into my education on this topic (I've been to a seminar about it).

It will be no surprise to anyone that there was plenty of jargon associated with trading currency (forex). Some of this is because traders need a way to talk about what they are doing but I would not mind betting some of this jargon is used to make those on the inside sound like they know what they are talking about.

The side effect of this "club" for those with a verbal version of the squits is that it serves only to make the whole deal seem like an incomprehensible, mysterious and dark form of voodoo. I've never though this was really the case and have found that largely it is not.

Anyone can trade (so says the speaker) and I believe him. All that stands between me and my first million is a whole load of learning.

Now the question of the hour is what is a pip? Why did I ask? Why should you care? And, more importantly, what is for dinner?

Well I don't know what your dinner is mine will probably be a pot noodle slurped as I speed home for some unearthly late hour.

Now on to pips.

A pip is a measure of the smallest change in the market.

Let us look at forex for example. Forex is currency exchange (see what I mean about jargon). Now with most currency pairs this would appear to be something like 0.01% so with Cable (That's USD vs GBP) the smallest change is $0.0001 (one hundredth of a cent). This 1/100 is our pip.

With something leveraged (like spread betting) one could trade at so many pounds per pip. (You readers from the USA would trade dollars per pip)

Let us go to another example. We'll stick with cable (Dollar-Pound remember). Imagine that I was trading at the rate of five pounds per pip. That would mean that for each pip change I would loose or gain a fiver. Yeah UK£5.00 could flush down the loo because of a 1% of a cent change the wrong way. Clearly you need to have a get out of the crap plan if things go wrong (I'll look at that later).

Now with our trade let us imagine that the market moved as I had predicted. I'm up by 20 pips! So if I get out while the getting's good I would have added one hundred pounds to my account on a movement of a mere one fifth of a cent. Clearly if I can guess well more times than not I should do very well.

Guessing which way the pips of change are going to flow seems like a mugs game. No sane trader would want to do that. This is why a strategy and a plan is called for. To know what is more likely in any given situation. Even if you are wrong sometimes (and I bet everyone is) if you could stop sooner when wrong an ride it when right the result would be profit.

You see the reverse is also true. If, for some reason, the trade went against me and I failed to get out and thus I lost 20 pips I would have just dumped one hundred quid out of my trade account. Poof - gone for good.

It would seem that you can set an auto safety net in the form of a stop loss. This does exactly what it says on the tin - stops loss. According to the Big Boss (Greg Secker) one should set a stop loss at 1% of your total stake. Thus you loose only a small amount and at that point you give up and get out with little pain.

Next I'm going to look at candle charts which hep you plan a trade. Stay tuned.