What's wrong with us forex traders?

What are you here for then? Are you on a crusade to be useless contributer and insult people trying to offer suggestions? The title was tongue in cheek. If you don't get that I'm sorry for you.

I think we are majoring in the minors here.

To me at least, pips are a better choice. They take money management out of the equation.

For example:

1 pip will always be 1 pip. Hopefully that is not news lol!

1 pip with proper money management may only be 0.001% of my account, but with faulty money management it may be 50% of my account and therefore carry alot more weight if the trade is successful.

Where I find fault in using a pip is when people cook the books so to speak. If they trade 1 lot and it moves 10 pips they say they made 10 pips. If they trade 2 lots and it moves 10 pips they say they made 20 pips.

Congrats neverfox for fighting against the stupid pips !

I wonder how many people understand that you can be positive in pips and negative in your balance because adding pips of different pairs is like adding apples to oranges.

That is a good illustration of what I said above.
1 pip is 1 pip but 1 pip EURGBP = orange, 1pip USDJPY = apple
1 pip EURGBP + 1pip USDJPY = what? 2pips of what?

neverfox you are right, its a better way to evaluate a system because you get to see what is the real rate of return for every dollar thats at risk. I believe Merlin recently posted something about the same thing, where he used the rate of return by amount of exposure to give real rate of return. So if a certain system return more pips than another system but the rate of exposure was higher, the lower rate of exposure system might win through, its basically for every dollar risked, how much do you get back in return, thats what we are really measuring.
But Neverfox, the problem here lies in the fact that most people here are testing system in terms of pips generated and the R:R ratio based on pips. Now it may not be very accurate but I think in forex its hard to find truly mathematical based entry and exit systems, so most people are finding systems and constantly tweaking it to increase r:r ratio or pips generated and thats all with some discretion included as well. Thats why there's a higher rate of failure in forex traders I believe. Its not the same as in equities where you have so much data available to analyze that you can put discretion aside more and rely more on the numbers, whether it be volumes based, or earning based or what have you.
Since most people are looking for a viable system they can trade and implement in matching with their personality, i think risk to reward ratio is a good general ball park along with the win percentage to determine a viability of a system. Now when you have two or more good systems with good R:R and win % ratio, I believe thats when I personally would look more into the amount of $ at risk vs. return. But so far I haven't seen any system that I've come across that even posts a good R:R and win % and is truly mechanical without human discretion to evaluate it mathematically in that sense.
But thanks for sheddin light into this arena, there are alot of traders here that backtests systems and this would be something valuable to add if you are backetesting with some fixed variables.

I reproduce part of a post below from a thread I started nearly a year ago to the day when I contributed to what eventually evolved in to the 1KT setup. I disagreed with the format that became 1KT. The original is here.

"If I make pips I have a profit. If I lose pips and have a net loss I have lost money at the end of the month.

How each and every one of us gets those pips - if we ever do - matters. But not as much as the bottom line. Profit. And here that means positive pips.

I started this thread because of a post I made here which was disputed. The differing opinion is below."

Pips are what counts. It's your profit. Even if it's a mixed basket of fruit!

Hope Darkstar wouldn't mind my using one of his post. It says everything.
http://www.forexfactory.com/showpost...0&postcount=18
"Pips mean nothing regarding profitability or competency as a trader because most traders have variable stop loss sizes. If your first trade has a 20 pip stop, you risk 1%, and you close it at +40 pips, you earned 2%. If the next trade has a 100 pip stop risking that same 1% and your stopped out, your down 60 pips but UP 1% in dollars.

So from a pip perspective your a net loser, but from a profitability standpoint your a winner."

Great post neverfox, the first part about pips vs % reporting should be stickied to the top of the forum.

I think part of the problem's origin lies inherently in MT4's gross shortcomings - it has no percentage reporting either in the daily fluctuations of each currency, or a trader's position/portfolio (the latter's absence is so completely incompetent from a platform design perspective, I have to wonder whether it's omission was purposefully deceitful...). And you really have to wonder why they have a Taxes field for open positions, but no %-change field.. Every other trading platform on the planet provides %-change fields.

And while I'm ripping on MT4, I have to get one more jab in on the local timezone issue, which I can't believe MT4 doesn't let the client set.. I swear those Russians were drunk when they programmed this mess.. My sincere condolences to anyone who actually uses MT4 for live trading...

In summary, if a majority of FF members rely upon MT4, then they have never even seen a %-change field (unless they have documented their trades in a spreadsheet). So I think we can safely place part of the blame on MT4's developers. Unfortunately for you and I, explaining %-change to FF members may continue to be a hair-ripping exercise in futility..

I have to agree with everything longhorn have said

Wrong again. I'll get my coat. :

@Phil - EXACTLY. Phew...

A pip is not a pip... and even someone who nets postive pips can lose money and vice versa. A pip is only a pip with respect to the amount risked on that particular trade. Just standardize and call it an R multiple.

It's simple calibration people. Standardization if you will.

A pip is not a pip.

If you still trade a fixed position size but vary your SL and TP's, you're doing yourself a great disservice.

The above is an example of the "1 unit per fixed amount of money approach"

It's quite outdated, and if you still use it, you're:

 

1. undercapitalized; OR
2. with a broker with inflexible lot sizes; OR
3. just don't understand this whole thread; OR
4. both undercapitalized and with a poor broker for your equity

You need to do some research on a "percent risk model" OR even better, a "percent volatility model"

If you still truly think a pip is a pip after reading about those 2 models and reading Phil's concise argument... I have some advice. Pull up a spreadsheet, and do the math.

This is just a left-brain vs. right brain thing... just a matter of the way you look at it. We're each going to have our own way, but in the end, we all reach the same conclusion.

Taking the liberty to speak on behalf of those of us on the "pip side of the fence" in this thread - we understand what you're saying. But we're able to mentally discount many of these factors due to the way we initially analyze a trading situation.

So while you say a pip is not a pip - we may refer to it as a mixed basket of fruit. And we're well aware of what's in that basket.

In repeated instances, it's been erroneously suggested that we either don't know how to manage risk or don't understand how to best determine how many lots to trade. YES WE DO! And it's all done very quickly and almost effortlessly - kinda like breathing.

I'd say that the odds are pretty good that each of us on the "pip side" are utilizing the "percent risk model" - which is just another way of saying that one limits their losses to 2%, or whatever, with the intent of trading larger lot sizes as our account grows. And that's the essence of compounding.

So by and large, we're all saying the same thing. But the pipsters think you may be over-analyzing things, while you don't believe we understand them to begin with. Again, maybe it just boils down to the left-brain vs. right-brain or a similar phenomena.

In the final analysis, there's no getting around the bottom line math of the risk/reward ratio times winning percentage - regardless of which side of the brain may be dominant.

Now one last thing that we all DO agree on - and this ties into scams, newbies and blatant ignorance - if you trade 10 lots and gain 20 pips, you just earned 20 pips, not 200!

P.S. If you want to have some fun, start a thread on leverage - and watch 'em go nuts arguing to the death, but largely saying the same thing from different perspectives. It's been done...

Brent, thanks for the thoughtful response. Your reply makes sense.

My main beef is reading through a semi decent thread and then all the posts along the lines of "I made 113 pips. YAY, you've shown me the moley quail etc..." And then the next poster comes on claiming X amount of pips over Y trades. The problem is that people who trade percent risk or percent volatility models cause a jarring disconnect especially when the setup that they're reading about involves discretion in SL and TP's, when they report their P/L solely in pips. This problem comes around with preliminary backtest results as well. In all situations I do my own due diligence before putting my money on the line, however, I'd love to find some places to throw legitimate spreadsheets around and talk ideas.

It's just hard for me to talk about ideas and the data behind them when the data lack any sort of standardization or calibration behind them. I prefer the very simple standard of Tharp's "R multiples." It lets anyone trading any model other than a single fixed unit understand quickly the nature of your trading successes or foibles.

The R multiple also takes care of the argument whether a 'pip is a pip." Because the value of a pip when discussing P/L varies depending upon 1) pair traded; 2) lot size for current trade, and 3) lot sizes of past trades , simply saying I made 5R over 3 trades has much more information than I made XX pips in 3 trades. It also accounts for people who scale in or scale out of trades.

I just tend to see a lot of the mindset that's present in new (woefully undercapitalized) futures traders. Those undercapitalized traders can only afford to trade a single contract in the YM or ES or ::shudders:: any of the bond or ag contracts. Due to this restriction, those traders learn the value of a tick such as $5 for the YM, and stick with it no matter what size of SL their trade of the moment requires. I just hate to see Forex traders stuck in that mindset.

I apologize to anyone that I have offended and hope mucho pips (or R multiples ) migrate consistently into your account balances.

Longhorn I agree 100 % with everything of what you say.

In my opinion counting in pips is not a question of left brain vs right brain, it is just such a nice tool for people who want to scam.

All the time we see announcement like "I made xxx pips this week", no % of ROI, no % of DD, just xxx pips. And then newbies jump in this trap.
If people would use correct way of assessing the validity of a system we would see much less of these scams.

But if people want to continue counting in pips and let scammer use that breach, then what can we do.
Some people need to get burned to understand that the oven is hot.

Thanks for posting such a good defence brentmack. I wasn't going to write further but your post prompted me.

Pipsters of the world unite.

During the month of April I lost over 1000 pips, but my account grew 20%. So who wants my system?http://www.forexfactory.com/images/icons/icon10.gif

Excellent !
You should start a thread with "lost 1000 pips this month" !!!
It would be a good lesson

To all,

I certainly don't want to start a pipsters-vs-nonpipsters war. I think you all have good points and it really comes down to context. Pips can be bad in certain contexts and fine in others. R multiples and % can be cumbersome when talking to someone about 1 lot EURUSD trades where everyone knows what a pip means. I just hope that the context-appropriate concept is understood and appreciated by all.

For your reading here is a great post that clears up some of the confusion are R multiples: http://tradermike.net/2006/09/r_r-multiples_defined/

Good thread everyone and good trading.

That's all we've been saying. I totally agree. I think where some of the confusion and offense has come in is over reportings total system results vs. individual trade specs. I certainly didn't mean to disparage your trading. I believe you when you say you understand risk management. What I meant to convey, poorly I'm sure, is that a system's results reported as total pips can't provide a risk-adjusted bearing for the person reading it unless the system states clearly that all trades have the exact same stop size for every trade along with the number of trades (which also assumes a standard pip value). But that's just giving the piece for the calculations we've been talking about.

I sure you use risk/reward in your trading and that's wonderful. But the point of R multiples and other risk-relative measures that that it allows a system designer to say to anyone, "Hey here's a trade. I don't know what your account size is or your risk tolerance. But take a look at it and my other trades and see if you think they are something you could trade." To do this you need a way to compare systems that is independent of account size ir leverage. Basically, for every X dollar risked (notice I didn't say anything about % of my account), how many dollars will a typical trade in this system make. Or another measure might be, ofr every X dollars of currency bought or sold, how much does the average trade make. These types of meta-stats allow for apples to apples comparisons of systems as opposed to system-plus-position-sizing-of-the-guy-telling-you-about-it. You don't want a measure that mixes in his idea of how much to risk on a trade. His system might decide that the SL is 50 pips away but only you can decide that a 50 pip risk trade will be relative to your account. But you need risk-adjusted measures to do this.

I understand that calculating stats isn't always fun but, as for being, over-complicated, it's done all the time by mutual funds, hedge funds, money managers and traders around the world. It's how they are compared. That's why you see things like Sharpe ratio and Calmar ratios on every fund performance page. It's the first thing institutional investors look for. "Ok, I see how much you are making me, but how much risk did it take?"

Thanks for posting TraderMike's link. That about sums up my entire argument in a most eloquent fashion.

R Multiples FTW!