I am working on this major upgrade for my trading system and something bothers me. I always knew that something isn't quite right about some of the concepts we use in trading. In particular the concept of pips.
So, I'm sitting here thinking about it, and then this idea came to me. The concept of pips makes no sense! Yeah, Ok, it gives you "some" information about the market...but.... WHY do we use "pips" as some kind of universal unit of measurement ?
Like most traders I never really thought seriously about it. We people often have this bad tendency to just accept things as they are. (And we automatically assume that there is nothing better out there, no alternative....just because everyone else thinks so)
Let me show you what I mean.
We analyze the market, and we look at the price, and we say - "the price fell N pips", or "the market is up N pips" , "the daily range is N pips"......."my stop loss is N pips".......etc. etc.....
Suddenly I realize, these measurements have very little meaning! And even smaller practical application.
What is a pips? A fixed fraction of price.
In the major usd FX pairs 1 pips is 0.0001 and 0.01 for Yen pairs. What about other markets? Well, guess what? They don't use pips. They use ticks. or points..... And each market has it's own perspective..... So maybe you ask - what's the problem?
The problem is that these units of measurement are not universal. You cannot use the same settings for all markets at all times. Also the unit itself doesn't carry any useful information. It's not related to the state of the market in any way. So over time, you constantly have to adjust your trade settings in order to account for the changes in volatility. For example, today your default stop is 20 pips, next month you have to use 30 or 40 because the volatility is higher.....
When we use pips(or any other fixed unit) to measure the size/length of the price movements we create delusions. And ultimately our analysis is incorrect and inefficient. The reason for this is because as I said, these units have no relation to the actual price movements.
If EURUSD is up 100 pips for the day, do we consider this for big movement or not? The answer is - WE DON'T KNOW! First, we have to look at the statistics in order to get some point of reference. If the ADR is let's say only 40 pips, then 100 pips is a big movement. But if ADR is 300 pips then 100 pips is small movement.
Looking at pips/points or ticks alone is meaningless.
And what happens if you want to compare EURUSD with GBPUSD or other markets? How do we know which market is stronger or weaker and which movements are bigger? And what happens if we try to compare different markets like FX with indexes, or gold with oil...? A mess! Even if we look at movements as percentages doesn't solve the problem. Because different markets have different volatility profiles.
The other major problem is that we use pips/points to measure the cost! We measure the spread with pips.
For example if the spread for EURUSD is 1.0 and for GBPUSD is 1.5 pips, Which pair has larger spread? Or in other words, which pair is more expensive to trade?
It may sound like dumb question, but it's not! The answer is (again) - We don't know!
Why? Because again, we do not include the volatility into the equation.
For example:
If EURUSD spread is 1.0 and ADR is 100
and GBPUSD spread is 1.5 and ADR is 200
then GBPUSD is CHEAPER to trade! (the opportunity for profit is higher and the odds for success are slightly better)
How to calculate this? Simple! Just divide the ADR by the spread. The higher the ratio - the better!
This way you can determine which markets provide the best opportunity and the highest odds statistically.
As you can see, you don't have be a rocket scientist, and you don't need complicated statistics in order to determine where the odds are higher.
It's quite obvious that if particular market shows range to spread ratio 20 you don't want to try to scalp this market. It's pointless.
A market is considered suitable for active intraday trading if the range to spread ratio is above 80. and ideally above 100 and more...
----------------------------------------------------------------------------------------------------------------------------------------------------
Now, let's get straight to the point.
How to solve all these problems with one shot? Can we do that? For sure there must be better ways to measure the markets?
Yes there are better, and more efficient ways.
For myself, I made the decision not to use standard pips in my trading. Not anymore.
So, I invented my own unit of measurement. This unit is completely universal, self-adaptable variable and works the same way on any market.
I call it "atr adjusted pip" or "atr pips" for short.
The concept is very simple.
1 atr pip = 20 day ATR / 100 (1 atr pip = 1% of the average daily range)
This is the mql4 code : double atr_pip = iATR(_Symbol,PERIOD_D1,20,0)/100;
I can use this unit of measurement for everything!
SL and TP distances, the bid-ask spread, price action measurements, the vertical scaling of the chart, all calculations for indicators and EA's.......everything.
It's my new standard tool, and in one shot it solves all the problems which I described above.
Best thing about it - this method works the same way, on any market, at any time.
With this, I can trade all markets with the same default settings.
For example, if I set my default SL at 30 atr pips, it will be 30 for all markets. FX, Indexes, metals, stocks,....etc. The stops are the same. And I only have to adjust the trade size for each market in order to equalize the $ value per pip.
Also by looking at the current spread represented as atr pips, I can see in real time which market provides the best odds statistically.
With this method for calculation I can apply exactly the same strategies for all markets.
-------------------------------------------------------------------------------------------------------------------
I hope that some people may find this concept useful. Post your comments and ideas.
So, I'm sitting here thinking about it, and then this idea came to me. The concept of pips makes no sense! Yeah, Ok, it gives you "some" information about the market...but.... WHY do we use "pips" as some kind of universal unit of measurement ?
Like most traders I never really thought seriously about it. We people often have this bad tendency to just accept things as they are. (And we automatically assume that there is nothing better out there, no alternative....just because everyone else thinks so)
Let me show you what I mean.
We analyze the market, and we look at the price, and we say - "the price fell N pips", or "the market is up N pips" , "the daily range is N pips"......."my stop loss is N pips".......etc. etc.....
Suddenly I realize, these measurements have very little meaning! And even smaller practical application.
What is a pips? A fixed fraction of price.
In the major usd FX pairs 1 pips is 0.0001 and 0.01 for Yen pairs. What about other markets? Well, guess what? They don't use pips. They use ticks. or points..... And each market has it's own perspective..... So maybe you ask - what's the problem?
The problem is that these units of measurement are not universal. You cannot use the same settings for all markets at all times. Also the unit itself doesn't carry any useful information. It's not related to the state of the market in any way. So over time, you constantly have to adjust your trade settings in order to account for the changes in volatility. For example, today your default stop is 20 pips, next month you have to use 30 or 40 because the volatility is higher.....
When we use pips(or any other fixed unit) to measure the size/length of the price movements we create delusions. And ultimately our analysis is incorrect and inefficient. The reason for this is because as I said, these units have no relation to the actual price movements.
If EURUSD is up 100 pips for the day, do we consider this for big movement or not? The answer is - WE DON'T KNOW! First, we have to look at the statistics in order to get some point of reference. If the ADR is let's say only 40 pips, then 100 pips is a big movement. But if ADR is 300 pips then 100 pips is small movement.
Looking at pips/points or ticks alone is meaningless.
And what happens if you want to compare EURUSD with GBPUSD or other markets? How do we know which market is stronger or weaker and which movements are bigger? And what happens if we try to compare different markets like FX with indexes, or gold with oil...? A mess! Even if we look at movements as percentages doesn't solve the problem. Because different markets have different volatility profiles.
The other major problem is that we use pips/points to measure the cost! We measure the spread with pips.
For example if the spread for EURUSD is 1.0 and for GBPUSD is 1.5 pips, Which pair has larger spread? Or in other words, which pair is more expensive to trade?
It may sound like dumb question, but it's not! The answer is (again) - We don't know!
Why? Because again, we do not include the volatility into the equation.
For example:
If EURUSD spread is 1.0 and ADR is 100
and GBPUSD spread is 1.5 and ADR is 200
then GBPUSD is CHEAPER to trade! (the opportunity for profit is higher and the odds for success are slightly better)
How to calculate this? Simple! Just divide the ADR by the spread. The higher the ratio - the better!
This way you can determine which markets provide the best opportunity and the highest odds statistically.
As you can see, you don't have be a rocket scientist, and you don't need complicated statistics in order to determine where the odds are higher.
It's quite obvious that if particular market shows range to spread ratio 20 you don't want to try to scalp this market. It's pointless.
A market is considered suitable for active intraday trading if the range to spread ratio is above 80. and ideally above 100 and more...
----------------------------------------------------------------------------------------------------------------------------------------------------
Now, let's get straight to the point.
How to solve all these problems with one shot? Can we do that? For sure there must be better ways to measure the markets?
Yes there are better, and more efficient ways.
For myself, I made the decision not to use standard pips in my trading. Not anymore.
So, I invented my own unit of measurement. This unit is completely universal, self-adaptable variable and works the same way on any market.
I call it "atr adjusted pip" or "atr pips" for short.
The concept is very simple.
1 atr pip = 20 day ATR / 100 (1 atr pip = 1% of the average daily range)
This is the mql4 code : double atr_pip = iATR(_Symbol,PERIOD_D1,20,0)/100;
I can use this unit of measurement for everything!
SL and TP distances, the bid-ask spread, price action measurements, the vertical scaling of the chart, all calculations for indicators and EA's.......everything.
It's my new standard tool, and in one shot it solves all the problems which I described above.
Best thing about it - this method works the same way, on any market, at any time.
With this, I can trade all markets with the same default settings.
For example, if I set my default SL at 30 atr pips, it will be 30 for all markets. FX, Indexes, metals, stocks,....etc. The stops are the same. And I only have to adjust the trade size for each market in order to equalize the $ value per pip.
Also by looking at the current spread represented as atr pips, I can see in real time which market provides the best odds statistically.
With this method for calculation I can apply exactly the same strategies for all markets.
-------------------------------------------------------------------------------------------------------------------
I hope that some people may find this concept useful. Post your comments and ideas.