Profit and Loss Percentage Indicator
A PIP is a Profit and Loss percentage indicator. It can be used as an alternative to the pip (price interest point).
In Forex trading, the pips/percentages are expressed as decimal numbers, e.g., 0.0001 or two decimal places, e.g., 0.001.
The denomination is not like currency pairs: GBP/USD, USD/EUR… EUR/JPY…
Indicators such as the PIP show how much you gain or lose on every position taken at the current market price – including any spread and commission costs you might have paid.
For example, if you bought 1000 units of USD/CHF @ 1.5800 and sold it back at 1.
5820, then your profit and loss will be:
1000 units x 1 pip = 10 USD / CHF
Total cost = (10x 0.0001) + spread and commission = 0.1 USD / CHF, therefore net gain is:
10 + 0.1 -0.2 PIPs per unit or 2 PIPs/1000 units @ 1.5800.
With a volume of 1000 lots, your profit would be 20 USD/CHF per lot traded if you got the entry and exit right on those two trades at those prices without any other costs involved such as spread and commissions (you bought and sold 1000 Lots).
You made a total of $200 for every 100 pips movement of the pair.
PIPs per unit is a good indication of your trading performance since it measures the amount of money you make or lose on every position you take in each currency pair.
As such, higher PIPs indicate better performance and good profits from successful trades, while lower PIPs indicates poor performance and losses from unsuccessful trades.
Pipette Scale (pip)
A pip (or price interest point) is another word for pipette – the device used to transfer liquid between one container and another.
The pipette scale uses 1000 pips as its base measurement, derived initially from 10^3 “price points” known as ticks.
A pip therefore is worth $10 USD / CHF (10 000 units x 1 pip = 10 000).
So if your USD/CHF pair opened @ 1.5850 and you bought 1000 units of it, then the first thing that would happen is that those 1000 units will cost you 10 000 x 1 pip = 10 000 USD / CHF or 1580 USD / CHF for a round turn transaction (a single entry and exit).
If you sold out at 1.5867, then your profit and loss would be:
1000 units x 0.2 pips per unit = 200 USD / CHF
Total cost = (200 x 0.0001) + spread and commission = 0.02 USD / CHF, therefore net gain is : 200 – 0.02 – 0.002 PIPs per unit or 4 PIPs/1000 units @ 1.5850.
With a volume of 1000 lots, your profit would be 400 USD/CHF per lot traded if you got the entry and exit right on those two trades at those prices without any other costs involved such as spread and commissions (you bought and sold 1000 Lots).
You made a total of $400 for every 100 pips movement of the pair.
$100 PIPs per contract indicates the net performance of an individual trader – simply divide the number by 100 to convert it into USD or your base currency.
For example, if your account shows 10 PIPs per contract, but you are trading in Euros, you have made €10 x 2 =€20 for every €100 traded.
If you trade in a base currency other than USD, just convert the numbers to the relevant base currency and do your calculations.
If you have been trading for many months or years, you can use this as a benchmark to track your overall performance from month to month or year to year so that you can see if things are improving or getting worse as time passes by.
Minimum Capital Required
Forex is not cheap to play, but it does not take much money to try Forex trading. You don’t need a lot of capital up-front to get going because margin requirements allow traders with limited funds to move large amounts of currencies.