Forex Trading 101 - What is a PIP? How does Leverage Work?

Forex Trading 101 - What is a PIP? How does Leverage Work?

When I am doing Forex Training one of the most frequent questions that I get asked when first talking to
people about forex trading is "What is a PIP?"

Pip stands for Percentage Increment Point

Since currency trading is buying one currency against another there are no shares to purchase. What you purchase is that actual currency. When you trade currency exchanges you are entering a position in that exchange, so you are positioning yourself on the side of one currency versus they other.



Lets talk in terms of the Euro and the USD. If I have information that is telling me that the USD is declining in value then I may want to buy a currency that is versus the USD. So we could buy the EUR vs. USD or (EUR/USD). As the USD falls the difference in the value between the EUR & USD gets larger. Well how do we define that? Money vs. Money. Money/Money=% right, if 5 apples out of 10 apples were bad (the difference between some being good and some being bad) well how do we define that 5 apples/10 apples = .50 or 50% are bad. So this would be a type of Percentage Increment Point or PIP, in this case it is 50 PIPS (because I only
gave you to 2 decimal places).

Lets say we are keeping track of the EUR/USD and for hypothetical reasons we are going to say that on Jan 1st 2008 it took $1.0000 EUR = $1.0000 USD. So if we looked at the charts we would see the price on that chart as 1.0000.

Well then we check that chart again on Jan 5th 2008 (great day in the year) we see that the chart price has changed to $1.0050. This means that now $1.0000 EUR = $1.0050 USD, it takes more USD to equal EUR, also meaning that the value of the USD fell by $0.0050, or a half of a cent.

Since I gave you the amount in 4 decimal places we are going to call that change 50 pips. Here are some more examples of this:

Change = PIPS
$.0001 = 1 PIP
$.0005 = 5 PIPS
$.0060 = 60 PIPS
$.0700 = 700 PIPS

So know you understand how a pip works. How does that translate to profit?

Well lets take out example of a change in the EUR/USD of $.0050

If I took $1000 and purchased Euros on Jan 1st 2008, and then sold those Euros for Dollars on Jan 5th 2008, I would have made a WHOPPING $5.00 because of the difference $1005 ($1,000 * $.0050 = $5).

Why then is there a FOREX craze going on? (and it's just getting started)

Well here is were the FOREX market comes alive. Ohh MY IT'S ALIVE!!!

This Beasts name is LEVERAGE. It is much like having your very own BIG FOOT (some say fictitious man-like beast roaming the forests with incredible strength). While having BIG FOOT as a friend is nice because you don't need a jack to change a car tire, no one would ever pick on you again, you might even get into some really cool clubs. While all of that is very cool, it sure does hurt when the dumb oaf steps on your foot, takes out walls in your house, destroys your neighbor's car, damages public property. He's a REAL Liability to have around!!!

So unless you have a shock collar to train Big Foot you better be very careful with him! Same goes with leverage, I actually recommend getting a shock collar and wearing while trading, shock yourself right before you place a trade just so that you are reminded that LEVERAGE can be VERY BAD. Please don't put a shock collar on yourself, I was only kidding.

So how can leverage be good and bad. Leverage works like this, it is a loan. Very hard concept, right?

Well in the stock market you can get leverage of 2:1 or 4:1 but really no higher. That means that if I used my $1000, when I placed the trade they actually placed the trade for $4000 (considering 4:1 leverage).

The FOREX market offers much higher leverage, brokers offer varying amounts from 50:1, 100:1, 200:1, and some 400:1. The most common is 100:1 leverage.

Wait one jiffy minute here, do you mean to tell me that if I had $1000 and I was able to trade with 100:1 leverage that would mean that I would be actually trading with $100,000. Why YES that is exactly what I mean!

So now you see that that with that same $1000 and that same Jan 1st - Jan 5th trade with 50 PIPS gain would go from $5 with no leverage to 100 X $5 = $500 and your new balance would be $1500.

This is what drives this new FOREX craze. That is a 50% gain in just a few days. So when we talk about PIPs we loosely associate that to percent gain. Most of the major pairs (currency pairs) pay 1% per PIP with leverage, others are slightly less but that is a whole different conversation and we will save that one for later.

So how is leverage bad? The previous case also hold true if your information was wrong and instead of buying the Euro you bought the US Dollar, that would have yielded a -50 PIP return and now your $1000 would be only $500, ouch!

Earlier I mentioned the information telling me what I need to do. That is what I am here for, I'm going to be showing you the secrets of the systems. Those things that have been kept secret from the many I am going share with you, mainly because this is really easy and I feel guilty
for not telling people how to make their lives better.

There are huge profit potentials in the Forex Market, and I myself have made huge profits, it is not unlikely to make 100, 200, or even 300 PIP profits in 1 day. Just today there was a 485 PIP move in the GBP/JPY (Great British Pound vs Japanese Yen) in 11 hrs.

Stay tuned! I will be showing you some really cool things to come, I will even be uploading some videos showing you examples of some really great gains and how you protect yourself with stop losses. Some of the things I will be showing will be worth THOUSANDS of dollars.

Add me as a friend, get in touch with me, tell me what you want to learn in this industry and I will do my best to getting to everyone's questions and posting the secrets pertaining to those questions.

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If you are dying to start in the forex market and you cannot wait for me to teach you stuff please get some eduction in the forex market before putting any real money in it. A good start to Forex Trading can be found here: Forex Training | Forex Trading

Have fun, and live intentionally!

I am Mission, and I have been given a charge, a quest so to speak from a higher calling to
help all of those that want to learn.