How many pips do you make?
February 15, 2007
I’m active in the forex market, as you may be aware. While I also trade the stock market, and sometimes futures as well, forex is my primary one. It’s something I got in to back in the early 1990s when I was a professional market analyst, and it’s held my attention since.
There’s one thing that bugs me about forex traders, though. It’s the way they use pips as some kind of meaningful measure of trading performance. “I made 100 pips.” “I risk 10 pips.” “The system produced 1500 pips in the last three months.” Can you honestly tell me what that even means?
The fact of the matter is that pip measurements are only good when you are doing a like-to-like comparisson. For example, it’s fine to talk pips when looking at two GBP/USD trading methods over the same timeframe. It’s also acceptable and reasonable to talk about pips when discussing risk/reward as when you are talking about how many pips you are risking vs. how many you might make. Also, it’s fine to talk pips when you are just speaking about the movement of prices.
If, however, you tell me how many pips you made this week I have no idea if that’s good or bad. Pips have different values across different currency pairs. Moreover, they have different values within the same pair over time for USD base pairs and the crosses, so if you make 10 pips per day what you actually make in monetary terms will change from day to day, assuming constant trade size.
Which brings us to the other side of the equation. Giving me a pip number doesn’t tell me how big your position is in either actual or relative terms. Thus, I don’t know what kind of risk you are taking or how much of a return you are achieving. Making 1000 pips on a $100 account doesn’t add up to much. Similarly, making 1000 pips when you are using 1:1 leverage also doesn’t total up very quickly.
So if you’re a forex trader, don’t just throw out the fact that you are making X pips per whatever timeframe in your trading, or that you want to make that many. Give me some way I can actually judge the relative value of those results, specifically in comparisson to the risk you are taking to do so.
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that said, being able to capture a 1000 ‘absolute’ pip move, regardless of the cross used, is a feat onto itself. Sure it doesn’t tell you the dollar value of the position but the question that should be asked is ‘how did you do it?’. It would then be up to you to decide how much leverage to apply to maximise you potential dollar gain. If you can identify such a potential move, it should not matter if you are applying leverage or not. 1000 pips is 1000 pips after all
Leonardo,
You actually make my point on the one side. You are speaking of a price move. I’ve got no problem for using pips in that regard.
There is a huge difference, though, when you present 1000 pips as your performance. You caught a big move. Great. Your leverage, though, matters enormously.
If you were trading GBP/USD, for example, a 1000 pip move is only around 5%. With no leverage that’s a fairly paltry return. I wouldn’t be patting you on the back. Similarly, if you were leveraged to the hilt I’d more likely call you lucky for not blowing up your account.
The bigger point of the post is that traders too often throw pips out there as a performance measure in situations where no real comparisson can be made. You normally don’t hear their trade frequency or holding periods, so you can’t directly compare it to anything meaningful. They don’t tell you what risk they were taking, so again you can’t really judge the value of their performance.
My favorite is when someone says “my method made X pips this week”, but when you look at the actual results you see that they were counting pips from simultaneous positions in different pairs like long EUR/USD and long GBP/USD. That means either you had to have a double USD risk or you need to cut the pip results in half.
You are idiots if you think pips don’t matter. Pips are all that matter. Do you think you need to make different trade if you have a lot of 10,000 or 10,000,000. you would make the same trade. why would you think any different. if you start out trading with the smallest lot and you make 100 pips per week why would you trade differently if you where using a much larger lot. the best thing to do is not trade your money but trade the market. don’t even look at your profit/loss. just look at the market and trade accordingly. if you trade money you might get out of a trade early because you make enough money and that is stupid. if you just trade the market and get the most out of each move, and trade that you make you will be a better trader. you don’t have to make special trades to make millions of dollars you just have to be consistent in the pips and the money will come.
Brian – You’re missing the point of the post. If all you’re doing is a self-comparisson where you know how much you’re risking and all of that, then by all means think in pips. You make good points about not getting caught up in the monetary value of it all (though I personally favor thinking in % terms rather than pip/point or $ terms when evaluating my performance). My argument here, though, is about how talking pips with other traders – unless they trade the same thing the same way as you – is meaningless. It leaves too much out.
If you tell me you made 1000 pips my response is going to be “And…..?” I don’t know if that’s good or not. How many trades did it take for you to get there? How much portfolio risk did you take? What kind of % return was that on your account? Without knowing the extra details I can’t judge whether you’re doing well, taking crazy risk, not risking enough, having to put too much effort into your performance, or any of the other ways I might come to a conclusion about your trading performance.