Direct answer: what “loss per pip” means
“Loss per pip” describes how much loss is attributed to each pip of price movement, based on completed trades. Because pip definitions and trade accounting vary, you must first set material assumptions: (1) what your pip size is for the instrument, (2) whether you measure losses in pips only or in money per pip, and (3) whether you include all costs (spreads, commissions, swaps) in the outcome you treat as “loss.”
A practical way to determine it is to compute, for each losing trade, the distance from entry to the exit (in pips) and the associated loss (in money or as a loss-only metric). Then combine those values into an average loss per pip using a consistent formula.
Explanation: inputs, definitions, and the calculation
Step 1: define the pip size for your instrument
A pip is a standard unit of price movement used in forex quoting. The exact pip size depends on the currency pair’s quoting format (for example, whether the pair is quoted with two or five decimals). Use the instrument’s market convention so your pip conversion is not inconsistent.
Assumption to state clearly: you use the same pip-size rule for every trade in your dataset.
Step 2: convert each trade result into “pips of adverse movement”
For a losing long trade, the price moved down from entry to exit; for a losing short trade, price moved up. Convert the absolute adverse movement into pips:
- pips_adverse = (|exit_price − entry_price|) / pip_size
Assumption: you are measuring the price path between entry and the final exit price, not the intratrade volatility.
Step 3: decide what “loss” means (pips-only vs money)
There are two common interpretations, and you must pick one:
- Loss per pip in pips-only terms: this can mean you measure “loss severity” using pips directly, such as average pips of loss. In that case, “loss per pip” is effectively the average loss distance per losing trade, not a money amount.
- Loss per pip in money terms: this requires converting pips to monetary loss using your position sizing and pip value.
If you choose the money approach, you need pip value consistent with your account currency and trade size. A generic expression is:
- loss_money ≈ pips_adverse × money_per_pip
Assumption: money_per_pip is the same for all trades only if position size and account conventions are constant; otherwise compute money_per_pip per trade.
Step 4: compute the average loss per pip
To avoid mixing winning trades into the “loss” metric, compute it using only losing trades.
Two verifiable variants:
- Average money loss per pip (losing trades only)
- loss_per_pip_avg = (sum(loss_money_i)) / (sum(pips_adverse_i))
- This equals the weighted average because pips_adverse can differ across trades.
- Average loss distance per losing trade (pips-only)
- avg_pips_loss = (sum(pips_adverse_i)) / (number_of_losing_trades)
Both methods are consistent if you use the same definition of “pips of adverse movement” and the same trade-cost inclusion rules.
Example and checks (how to verify your method)
Small example with pips-only metric
Suppose you have three losing trades where adverse movement is measured as 8 pips, 12 pips, and 5 pips.
- avg_pips_loss = (8 + 12 + 5) / 3 = 25 / 3 ≈ 8.33 pips
This directly quantifies the typical size of loss in pip distance. It does not claim anything about account currency impact.
Small example with money-per-pip metric
Assume each losing trade uses the same money_per_pip, and the money losses are already recorded as values consistent with that rate. If losses are −$16, −$24, and −$10, and adverse pips are 8, 12, and 5:
- loss_per_pip_avg = (16 + 24 + 10) / (8 + 12 + 5) = 50 / 25 = $2 per pip