Okay so in the previous section, we ended by taking a look at PIPS. We learnt that a PIP (Percentage In Point), was the measure of a single movement in a Currency Pair. The same word is actually applied to any other trading market out there, be it Indices, Commodities, Stocks etc. and is not just synonymous with the Forex Market.

Forex profits

In this section, we will be looking at the relationship between PIPS and Profits specifically in a Forex Trade. This is going to give you a much clearer understanding of how we profit from a trade in Forex.

Looking at PIPS in more detail

You will very often hear traders talking about their trades in terms of how many pips they won or lost. For example, let’s say you open a trade on the EUR/USD.

You go long on the EUR/USD at a current price of 13582.0

The EUR/USD moves up to 13612.0 and you close the trade

This means that you have made a profit of +30 PIPS.

Remember when you go long, it means that you BUY, thus you believe the EUR/USD is going to go UP. Let’s look at another example:

You go short on the GBP/USD at a current price of 15960.4

The GBP/USD moves down to 15944.7 and you close the trade

This means that you have made a profit of +15.7 PIPS.

On this GBP/USD trade you decided to go short, meaning you decided to SELL, thus you believe the GBP/USD is going to go DOWN. The market moved in your favor and so you closed the trade and took your profits.

Quick Test

Taking what you have just learnt you are now going to be presented with five questions, do your level best to answer each one, checking your answers with the answers below. You may use a calculator.

1. You decide to enter long on the GBP/USD, at a current price of 15951.1

You exit the trade at 15974.4

What is your total PIP gain/loss?

 

2. You decide to enter short on the EUR/USD, at a current price of 13510.5

You exit the trade at 13499.5

What is your total PIP gain/loss?

 

3. You decide to enter long on the AUD/USD, at a current price of 9508.2

You exit the trade at 9484.3

What is your total PIP gain/loss?

 

4. You decide to enter long on the USD/JPY, at a current price of 9862.9

You exit the trade at 9947.7

What is your total PIP gain/loss?

 

5. You decide to enter short on the EUR/USD, at a current price of 13436.7

You exit the trade at 13390.2

What is your total PIP gain/loss?

So, how did you do? I hope that was pretty straightforward. If you failed to get them all or at least 4/5, scroll back to the beginning of Lesson 3 and ensure you understand the ‘Looking at PIPS in more detail‘ section.

Answers
1. +23.3 PIPS
2. +11 PIPS
3. -23.9 PIPS
4. +84.8 PIPS
5. +46.5 PIPS

What is a single PIP worth in terms of money?

Okay great, so you have a winning trade of 30 PIPS, BUT what does that actually mean in terms of how much money you have made? What is a single PIP worth? What is your profit for a particular trade? This next section aims to answers all of these questions

If we had a winning trade of 30 PIPS, what would each PIP be worth? The short answer is it is up to you.

From Pips to Profits

You see, in Spread Betting you actually decide what each PIP is worth to you in a particular trade, this is known as your ‘Stake Size’ or ‘Amount per pip’ . For every PIP the market moves in your favor, you will gain that amount. Conversely for every PIP the market moves against you, you will lose that amount from your trading account. This can be summarized in the following equation:

Stake Size x PIP Win/Loss = Total Profit/Loss for that trade

Now do not be alarmed! You do not have to memorize this formula, your broker (the platform you use to trade through), will calculate all of this for you, and show you your current live profit as the market moves. I just feel it is important for you to know this, as it will help greatly towards your overall understanding of Forex.

Let’s look at an example, let’s say we trade the EUR/USD:

We want to enter short on the EUR/USD at a current price of 13480.0

Before we Open the trade, we must input our Stake Size.

We decide that we want each PIP to be worth £10.00

The market moves in our favor and we close the trade at 13450.0, thus securing a +30 PIP win.

Stake Size x PIP Win/Loss = Total Profit/Loss for that trade

£10.00 x 30 = £300.00

So we made a total profit of £300.00 on this particular trade. Had the market moved against us by 30 PIPS, we would have lost £300.00. As you will see later on there are steps we can take to protect ourselves from huge losses, which will be looked at in more detail in a future section of the FREE Forex Beginner Course.

Okay, let’s have a quick test.

Quick Test

Taking what you have just learnt you are now going to be presented with five questions, do your level best to answer each one, checking your answers with the answers below. You may use a calculator.

1. We open a position on the EUR/USD at £5.00 per point.

We close the position at +12 PIPS.

What is our total profit/loss for this trade?

 

2. We open a position on the GBP/USD at £120.00 per point.

We close the position at +48 PIPS.

What is our total profit/loss for this trade?

 

3. We open a position on the AUD/USD at £10.00 per point.

We close the position at -14 PIPS.

What is our total profit/loss for this trade?

 

4. We open a position on the USD/JPY at £1500.00 per point.

We close the position at +23 PIPS.

What is our total profit/loss for this trade?

 

5. We open a position on the EUR/USD at £170.00 per point.

We close the position at -8 PIPS.

What is our total profit/loss for this trade?

Answers
1. + £60.00
2. +£5,760.00
3. -£140.00
4. +£34,500.00
5. -£1,360.00

Again nice and easy I hope! At this point you should have a very sharp understanding, of how PIPS relate to actual Profits in a Forex Trade. At this point let’s quickly recap what we have learnt so far in the FREE Forex Beginner Course.

We have learnt about what the Forex Market actually is and what the Forex Opening Sessions were around the World. We looked at the fact that in Forex we are trading Currency and more specifically Currency Pairs, we also identified the things that make up a Forex trade such as; Going Long or Short, Bid/Ask Prices and Spreads.

In Lesson 3 you learnt all about PIPS and their relation to monetary profits in terms of an actual Forex Trade, we did this by looking at examples as well as completing a couple of quick tests, in order to ensure that you fully understand PIPS and Profits.

So the next obvious question is, HOW should I trade? and that is exactly what we will be looking at next, in Lesson 4 of the Forex Beginner Course.

Next Lesson: 4. Different ways to trade the Forex Market

 

 


Trading CFDs, Spread Bets and Foreign Exchange carries a high level of risk to your capital with the possibility of losing more than your initial investment and may not be suitable for everyone. Ensure you fully understand the risks involved and seek independent advice if necessary.

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