How Many Pips Did You Make Today?
How do you track your progress as a Forex trader? Many traders keep track of the number of pips
they are getting each day. In fact, many
traders have a goal of making “X” number of pips each day. If they reach that number of pips, then
perhaps they stop trading for the day.
In this article, we are going to discuss why pips are a very weak
representation of true account status, and we will discuss a better
alternative.
The Problem With Pips
Let’s break down a hypothetical trading scenario. Let’s assume Joe is trading 1 standard
lot. He buys EUR/USD at 1.3000. Joe is a responsible trader, so he has a stop
loss at 1.2950. As soon as Joe enters
the market, buyers storm the market and EUR/USD begins flying up. A few minutes after Joe buys EUR/USD, he is
already up 35 pips. Now, Joe doesn’t
want to lose all of his profit, so he closes out half his position at +35
pips. Remember, Joe is long 1 standard
lot, so each pip equals $10. By closing
out half his position, Joe has earned $175 (35 pips multiplied by $5/pip).
As soon as Joe closes out half his position, the EUR/USD hits
strong resistance, and sellers begin pushing price back down to
Joe’s entry. Eventually price comes all
the way back down to 1.3000, and Joe gets out at breakeven on the remaining
portion of his position. Therefore, Joe
has banked +35 pips for $175 of profit.
A few minutes later, Joe opens a second trade. He sees that the market is now trying to move
lower, so Joe sells 1 standard lot of EURUSD at 1.2990, and he places
a stop loss at 1.3015. This time Joe is
not so fortunate. As soon as Joe sells
EUR/USD, price begins flying up. Within
just a few minutes, Joe’s stop loss at 1.3015 is hit. Joe has lost 25 pips on his full position,
which means he lost $250.
Now, look at the math. Joe earned 35
pips on his first position, and only lost 25 pips on his second. Therefore, Joe is actually up net +10 pips on
the day. However, Joe won $175 and then
he lost $250, so he is actually down $75 on the day. Thus, Joe is up 10 pips and down $75. This is why pips are not a good measurement
of how a trader is performing in his Forex
trading account. A better
alternative is to track trades according to R Multiples.
R Multiples
One way a trader can manage risk is to always risk the same percent of his
account equity on every single trade.
For example, perhaps a trader wants to risk 1% per trade. If a trader closes out a winning trade for
+1%, then he would have had a 1.0R win.
If a trader gets stopped out of a trade at -1%, it would be a 1R
win. Then, if trades are closed out by
scaling out, keeping track of results is much more accurate. For example, let’s return to Joe’s winning
trade. If his original stop loss of 50
pips equalled a 1% risk, and he closed out half his position at +35 pips, then
you take 35 divided by 50, which equals 0.70.
Thus, in terms of percentage, Joe lost 0.7(1%) = 0.7% on the trade.
If 1R = 1% for Joe, then Joe had a 0.7R loss on the trade. If Joe took a second trade on the day and got
stopped out of his full position, then he had a full 1% loss or a 1R loss. In Joe’s case R will always equal 1%. Therefore, now we have a more accurate
reading of Joe’s performance. Joe had 1
win for 0.7R and 1 loss for -1.0R, so Joe’s performance on the day is now
-0.3R. Since R equals 1%, we know that
Joe is down (1% multiplied by 0.3) 0.3% on the day. In this type of accounting, pips do not
matter at all. Whether Joe is risking 50
pips, 15 pips, or 200 pips on a trade, his risk is always the same—1%.
Keeping leverage low and trading adding stop-losses to your trades is key
to surviving as a Forex beginner. Trading with leverage is risky and therefore
you should never speculate with money that you cannot afford to lose.
