Retail FX traders have an odd habit of reporting how many PIPS they have gained or lost.  A pip is a “Price Interest Point”.  It is the smallest possible fluctuation in any trading instrument.  So if GBP/USD is bid at 1.9280 and offered at 1.9284, we say that the spread between the bid and the ask is 4 pips.  In this case, a pip is 1/100th of a cent.

 Seeing as how the FX market offers all traders fantastic opportunity to get creative with their position sizing via a smart use of leverage, I have a hard time understanding why anyone would quote their profit and loss in terms of pips.  If I invest in a stock, it would be common for me to tell you that I made 10%, not that stock XYZ went up by 326 cents.  To quote profit and loss in terms of pips is to completely ignore the least sexy, but of course, most important part of any successful trading strategy, and that is the position sizing algorithm.  It may be convenient to quote an invidual trade’s profit or loss in terms of pips, but over a series of trades, the percentage return will tell the only story that is relevant for the trader;  the MARKET may have moved a certain number of pips, but my ACCOUNT’s return depends heavliy on how I vary my position size relative to my account size, market volatility, etc.   While it IS fun to speak in pips to describe price action, it’s more fun to talk about how that price action affected the account.

Part 2 is here