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What is a Pip in Trading?

Here is a complete guide about a pip in trading. If you have spent years in the field of trading, you must have been managing many accounts or working on the stocks. At some point, you are expected to display patience and move on from your trading lessons from the beginning. A pip, or a trader who is adept in reducing the decline of his / her trades, is a leading indicator for success in the market. 

What is a Pip? 

Let’s start with the obvious question: what is a Pip in Trading? A pip is a loss against a win. At the end of every trading session, the trader performs a trade where the ratio of the gain to loss is the lowest. A trader experiencing this kind of a ratio is said to be in a trading position which may not be the best. This is because the trader is bearing the risk of the buy and sell of his positions. 

The Strong Case for Buying a Pip: 

If the ratio of gains to losses is too low, one can expect higher profit in the subsequent trades as the trader seems to be on the right track. It is a common theory that for a trader who is able to take care of these situations that he is confronted with, he can reap a good profit. 

There are certain strategies where a trader can buy a pip and combine it with his existing position for enhanced profits. For example, a trader who is in a bearish trend can buy a pip where the ratio of gains to losses is the highest and add it to his existing position. This strategy can potentially be a wise one. 

  • Selling a Pip: 

Another strategy is selling the pip. An example of selling a pip would be if the ratio is greater than 3:1. In this case, the trader can lock the profit and lock the loss in the security while increasing his risk. The trader will need to follow this trend and use it for the next trade or stock. A risk-taking trader can take such a risk because of the big profits that are expected in a short time. A final point to take note of is that if the current position becomes a pip within a week, the trader needs to hold the position for at least a month to accumulate the profit. 

A trader can identify a pip when the ratio between the gain and loss is very close to 3:1. Sometimes, these trades are not profitable, however, it is better to own this type of position because it is only a matter of time that the investor will realize the profit. 

Disadvantage of a Pip: 

The disadvantage of a pip is that there is a risk of using it for long-term positions. A bull run will lead to a quick loss if you are not in a position to avoid taking the risk of a falling market. 

Conclusion:

When choosing the position, it is important to understand the risk of trading a pip. If you do not manage your risk properly, you might not be able to pull off the trade. It is not wise to attempt a trade when the ratio between gains and losses is lower than 3:1 or is equal to 4:1.

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