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I don't understand how one can make more than pennies on a trade when the price will only increase in minuscule amounts - pips.

Harry Kitchener
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    Consider how volume and short holding periods may allow one to compound returns quickly. – JB King Mar 31 '14 at 18:47
  • I'm just curios; if you made for example 80pips in a day, how much would one have made? – Harry Kitchener Mar 31 '14 at 18:54
  • 80 pips as you restricted what I can use to compute things. Imagine a case where a person makes dozens of conversions in a day with thousands of dollars going into various exchanges. – JB King Mar 31 '14 at 18:59
  • I'm ever so confused about pips; is a pip a currency, so if EURUSD is 1.3568 is that a difference of $1.35? – Harry Kitchener Mar 31 '14 at 19:00
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    @HarryKitchener no a pip is the difference between 1.3568 and 1.3569 – assylias Mar 31 '14 at 20:08
  • But is it seen as a currency; what does it mean. I understand that int he market they have 4 decimals and a pip is the 4th, but why can't it just be normal currency? What does a pip actually mean when you convert it to real currency? – Harry Kitchener Mar 31 '14 at 20:29
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    @HarryKitchener a pip isn't a currency, it's a dimensionless number that means 0.0001. In a trade of $1000, every pip would mean a $0.10 gain/loss; in a trade of million dollars, every pip would mean a $100 gain/loss; in a trade of a billion roubles, every pip would mean a 100000 rouble gain/loss - it's just a multiplier/coefficient for the actual trade amount. – Peteris May 20 '14 at 21:37

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The short answer: leverage and, consequently, lot sizes.

The value of a pip is directly related to the size of your position. With Forex trading offering large amounts of leverage (50:1, for example), even "small-time" traders can take large lot sizes and increase their unrealized gain per pip. On the flip side, this also leads to increasing their risk when the trade moves against them, and the combination of high leverage and the desire to see moves of more than a few pennies is a big reason a lot of rookie Forex traders blow up their accounts when a trade moves against them (live by the sword, die by the sword).

Jim
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I assume you're referring to foreign exchange trading (since that's the primary market where the word pip is used).

In that case, remember that the absolute minimum trade size allowed is usually 1000 EUR/USD/GBP etc, and the "standard" trade size is 100K or 1M units. So a 1-pip move might mean only $0.10 profit (or loss) per contract for a small trader, but it could mean $10-$100 per contract for a large (or "normal") trader.

I found this article that might explain a bit more.

dg99
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A pip simply provides a means of quantifying the price movement in the Forex markets and does not signify the profit or loss that is made on the move.

The trade sizing or amount of 'leverage' that is used on the account will determine the actual profitability or otherwise of the trade. Brokers can offer anywhere from 10:1 to 400:1 leverage which will determine the actual financial amount that is won or lost on a position.

There is a saying that you can make a fortune from booking just '10 pips of profit' a day - but of course you would need to have some scary levels of leverage in order to do this.

Interestingly some forms of financial trading such as Binary Options offer a set level of payout that is made, even from finishing 'one pip' on the right side of the contract. This has a similar effect to leverage in that is magnifies the gains that are made.

Check out this article to find out more.

PhilM
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