A forex pip stands for percentage in point, the smallest price increment. Prices are quoted to the fourth decimal point, for example if you were to trade the GBP/USD at a bid price of 1.6526 and offered at 1.6529 the spread in this case is 3 pips wide. A forex pip move in the GBP/USD would result in profit or loss of $10 per pip, the minimum price movement of a currency pair. If you the trader would (BUY) going long one lot GBP/USD position at 1.6529 expecting the market to go your way being bullish and later sold it out at a (BID) price of 1.6579, the gain in that trade would be 50 pips and the profit on that position would be $500.00 dollars or 50 pips x $10 x 1 lot. A 50% return on your investment in a standard purchased lot which controls 100,000-GBP position and a required margin of $1,000 to $2,000 in your account which is referred to as leverage.
Leverage can work both ways, for you or against you if it’s not managed properly. In this example on one side with a small investment it can give you as the trader a large profit potential. On the other side the opposite can happen just as quickly leading to a large loss resulting a return on your position less than 50%. Let’s say the market went against you and the same GBP/USD position you bought at 1.6529 going long went the opposite direction- shorting, the market being bearish and so to cut your losses you stopped out at 1.6479 selling your position at a 50-pip loss. That’s why following trading rules and being a disciplined trader with appropriate money management is ammunition you can carry to add leverage to your trading game.
