A pip is a fundamental term in cryptocurrency trading. It stands for “percentage in point” and measures the change in price between two currencies. Pips are typically shown as a fractional value, such as 0.0001 for most cryptocurrencies.
When you’re trading cryptocurrencies, your goal is to make money by buying a currency when its price is low and selling it when its price is high. However, you don’t only want to focus on the overall price change; you also need to consider the size of the price change. This is where pips come into play. You can think of it as the smallest measure for price changes.
How to Calculate Profit/Loss
The formula for calculating how much profit or loss an investment has made is pretty simple: Profit / Investment = -1 * 100% * (price at end – price at start). For example, if you invest $10 into a currency and the price rises to $11, you’ve made $1. Conversely, if it’s fallen to $9, you’ve lost $1. This is where pips come into play because, depending on how big or small they are, they might make more difference in your overall profits than the actual difference in prices.
For example, assume that a currency has six decimal places (i.e. 0.00000) and its price was $100 at the beginning of the day, and by the end of the day, it had risen 10% to $110. If we calculated our percentage gain using just this percentage change ($10/$100=0.1), we would have made a return of 10%. However, the actual price of the currency has only risen by $1 (from 100 to 101), which is a percentage change of just 1%, so on your investment, you’ve made less than what you would have if it had risen further.
If we use pips to measure our results, however, we find that because there are six decimal places in this particular cryptocurrency, each pip is worth $0.0001. Unlike percentages where gains and losses can be smoothed out and not directly comparable across different amounts invested, pips work across all investments and even currencies themselves. If an asset rises 5% from £100 to £105, that’s a gain of £5 overall or 500 pips on a $100 investment.
Pips Can Help Determine When You Should Exit a Trade
Let’s say you participate in Bitcoin trading, and you buy one Bitcoin for $8,000 and sell it one hour later for $8,100. If the price of Bitcoin starts to decrease and falls below $8,000, you would want to sell your Bitcoin and cut your losses. This is because you would be losing money on the trade if you continued to hold it. However, if the price of Bitcoin starts to increase and climbs above $8,100, you would want to keep your Bitcoin and ride the wave up.
This is where pips can be very helpful; they allow you to make informed decisions about when to exit a trade. By monitoring the size of price changes, you can better understand the overall trend and identify critical levels where you could stop out of a trade if the price starts to fall.
Pips May Vary Between Exchanges
Depending on which exchange you use and the currency in which your account is denominated, pips may vary. For example, some exchanges calculate pips as a percentage (e.g., 1%), whereas others use decimals (e.g., 0.0001). Due to different market conventions, there may also be slight differences between how USD/BTC pairs and EUR/BTC pairs calculate pip values. However, these discrepancies shouldn’t impact your ability to make informed trades or guide your decision-making process as long as you concentrate on how prices change relative to one another.
Once you understand the basics of how pips work, it’s essential to do your research and practise with a demo account until you ar4e certain you can take actual trades. Different exchanges will often have slightly different pip values depending on which fiat currency is being used and which trading pair is assessed. For example, Kraken and Bitfinex might each display pip values that are $0.0001 apart from one another, even though they’re both denominated in USD. Therefore, until you’re confident in your abilities as an investor and know for sure how a particular cryptocurrency calculates its ‘pips,’ it’s best to stick with practising on a demo account first.