Risk Management and Counting Pips
What is a PIP?
The movement of the prices in a tiny increments or decrements
Why is it important that we should know how to count pips?
Based on the previous articles we have:
we have always mentioned PIPS and POINTS.
We should what is a pip in order to:
- Calculate when trading
- To set Stop Loss, Take Profit, and Breakeven points
- To calculate the risks
This is the basics but we should know the grave importance of Points in Percentage (PIP).
One of the important in trading was to put Stop Loss (SL) on each trade. And knowing the number of PIPS can helps us realize how many pips can we afford to loss. And calculating this number of pips to a USD for example enable us clearly to see the value of each entry that can possibly loss. Stop Loss is more related to Risk Management.
Also it is also advisable adding Take Profit on each of the entry in order to lock the profit just in case that trend will do a reverse. Knowing the number of pips enables us also to calculate how much profit in USD we get. In case also you have a weekly or daily target, it will be easier how many trades we can do in a day or in a week or how many entries with the Take Profits we need to do.
Usually we do breakeven to lock the profit or moving the SL to its entry point few pips (around 1-3 pips) above when buy or below when sell. You can check the details on Breakeven here: How to and Why Breakeven
Risk Management is closely related to SL. So to make it short, how much money are we gonna afford to loss for each trades or set of trades? For example, we have $100 balance on our account. Then we can only afford to 10%. Thus when we open an order knowing the number of pips of the SL to its entry point enables us to calculate the possible loss we can have.
- Case 1: one entry only
EURUSD with an SL of 30 pips will be equivalent to $3.00 for 0.01 lot. In case it will hit SL, possible loss is $3 for a 0.01 lot. So it is 3/100 = 3% only which is lesser than 10% as our example.
- Case 2: two entries
Same as Case 1 but this time is two entries because we want to have 2 TPs target. So if we enter the same lot size 0.01, then possible loss will be $6, thus only 6% on this.
- Case 3: in combination with other pairs with multiple entries
Let’s say we want to add GBPUSD with same lot size and SL at 30 pips. And with the same scenario at Case 2. Two entries of GBPSD.
In this case, we can have $12 possible loss, that will be 12% which is more than our amount we can afford to lose. We will be talking on this Forex Risk Management in another article. As of now, we would only like to know the importance if pips in relation to the Risk Management.
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