:: Pips are not what counts ::

IMHO, many of the posters in this thread have missed a very subtle but important distinction. There is a huge difference between a good trade and a good trader. Pips can be used as a decent measure of a good trade - but they are never the measure of a good trader. Any idiot can be lucky enough to make a good trade which yields a lot of pips and ultimately provides a (temporary) boost to the bottom line - but only a good trader has a high percentage of good trades that result in consistent results over time.

The analogy I would draw comes from gambling. I lived for years in Vegas and I can tell you that I made a lot of good bets in my time there. There were times when I would walk up to the sports book window and place a bet that I KNEW was a good bet. I didn't know for certain that it would win, but I knew that I was making the best possible use of my betting dollars - and it often resulted in a handsome payoff. So if a tourist on his first day walked up to the window and made the exact same bet right after me, was he placing a good bet? Sure. Did placing that one good bet make him a good bettor? Absolutely not. Even if the bet performed as planned and we both collected our winnings, there was a good chance that by the end of the weekend the novice was broke and I was still enjoying the site of the new money sitting in my bank account.

Another key fact is that of volatility (quantified often as drawdown). Suppose I showed you a mythical system that made 5 pips of profit EVERY SINGLE DAY without fail - no losses. And then suppose that I showed you another system that gave you 3000 pips of profit by the end of every year, but to get to that profit level, you had to endure huge drawdowns of 1000 or more pips. Which is the better system? Clearly, the first system is superior. Even though it yields fewer pips, it is infallible and as such, you can go "all-in" with it every day. Whereas with the 3000-pip system, you can only risk a small percent of your capital with each trade because you always have to account for the inevitable nasty drawdown.

This shows why pips alone cannot be the ultimate measure of the better trader, although they may indeed be the most convenient measure of the better trade. I also concur with previous posters who have pointed out that feathering into/out-of positions can lead to wildly misleading pip-counts that do little to quantify the success of your trade.

Having said all of this, I do understand why pips are so commonly refered to here as the common currency of performance. They are a basic unit that we all can all relate to and each one of us can apply our own money management techniques to the pips that are displayed in these threads.

Not to pick a fight Buddha, we are all looking for the same thing here - but I just moved out of Rochester, NY. The HQ of EK.

There is nothing resurgent about EK. THey have knocked down nuilding in the town of Greece and City of Rochester because vacant buildings are taxed differently than empty lots.

Kodak used to be a great place. Till smugness gave them incureable cancer.

Company culture, like trader psychology - that is the whole game right there.

Cheers and Best to you!

I have kept tabs on further comments on this thread thanks to the fine email alert technology from this forum.

A few of the comments from posters, especially one about "certainty" of profit, impelled me to mention a book I recently read which absolutely validates how one can expect to profit from the markets, including Forex.

It is called:

The Only Three Questions That Count: Investing by Knowing What Others Don't
by Kenneth L. Fisher

A book from an accomplished investor, (feel free to check him out on Google or Amazon) it goes to great length to explain why the three questions are crucial to success in a free market.

The basic premise of the book is one I've personally championed for many years. That is, for someone to profit from any market situation; stocks, real-estate, bonds, forex, commodities, etc. markets; you must KNOW AND ACT ON something important that is not widely known, or at least acted on yet; by the rest of the investing world. Not just believe something and act on it, KNOW something for sure and act on it.

You don't have to get the book to find out the questions. But you will for his answers of how to turn the questions into a definite strategy for profits.

The three questions are:

 

1. What do you believe that is actually false?
2. How can I fathom what others find unfathomable? And,
3. What the heck is my brain doing to blindside me now?

I think most of the people of this forum will at least find the thought processes available from the book useful to their trading endeavors.

Story

In the early '80's I partnered with a retired CBOT trader in a futures brokerage house so we could both get reasonable commissions for our own trading. His 87 year old father was a CBOT trader before him, and still came to our office nearly every day, trading up a storm in bonds, wheat, beans, Swiss Francs, everything--- profitable on an annual basis according to his own method. His son never had half of the old man's abilities, but found a way to cut out decent annual profits for himself.

The father and I got many chances to talk together because we tended to be trading the same directions, if not the same sizes. We were both breakout style traders while his son was more of a counter-trend trader.

One day after a particularly profitable day, with a big smile on his face, he exclaimed to me: "All one needs to do to make money in a market is know one thing, for sure about it."

I then waited to hear the punchline. He looked at me, waiting for some response. I then said, "And what is it?"

Looking a little exasperated, he said again, only very slowly; "All - one - needs - to - do - to - make - money - in - a - market - is - know - one - thing - for - sure - about - it."

Then I got what he meant. You need to know information that others don't know- with the same certainty! I've never forgotten the principle since.

In this case we absolutely knew, from informational sources that were beyond contention--- that the trading trend for soybeans was up for another month. The large majority of the trading world didn't.

With appropriate money management, we made our money for the year in less than 2 weeks. And another year's money the next 2 weeks.

Is this kind of thing possible in other markets? Absolutely. And it doesn't have to be illegal, inside information, or front-running information like so many are trying to do now.

It could be a technique that is bulletproof for present trading circumstances. Or some sure way of acting on the news that flows constantly in the markets that is different yet more efficient than what has been done up to now. Or a method that safely uses oscillations in the market to create a mathematical profit with guaranteed risk control.
(All of the above are already being done by traders who have discovered their "one thing for sure about the market" that the majority do not.)

It will not be some lightly conceived "trick" that you will find on a forum, unless someone comes up with something fantastic accidentally and mentions it without proper testing. That likelihood is about the same as you coming across a million dollars cash in a briefcase on your doorstep.

I keep learning every year in the business of trading. To be competitive, I think it is necessary. That doesn't mean that you have to change what you already know works, but education can help you eliminate things that you "know" which are really untrue. You can afford many of those things.

Fortunately, most ways of profiting from Forex aren't from competition between traders. There is tremendous profit available to be trapped if you examine the structure of the forex market and how things really interact. There really is enough money in Forex available for any trader who is willing to take it.

Probably not for very new traders though.

Most new traders don't know much, for sure. Yet.

Except the following:

 

1. A great EA to automatically trade the forex market for them.
2. They want pips. The more they are promised the more they like it.
3. They don't want to be bothered by the real risks, or anything that measures risk.
4. They want the profits to come in without spending the time that is necessary to monitor the market.
5. They don't want to know why the trading works, they just want it to work quickly and send a weekly or even daily check.

If trading could easily succeed by just having those desires, I'd be right in line with them. But alas, it isn't that easy.

Happy researching!

TheRealThing

What do you mean by the bold though? Are you using 10% of your money on lots in the trade, or are you just risking that much in your account?
If I have $10,000 and I use 10% of that to buy lots($1000), in my account I just bought 4 lots. At $250 a lot, with my amount of leverage.
Some people will be able to buy 2 lots at that price, and some less.
Just using that really random example, it doesn't matter how much money you have or started with. With my leverage, I just made as much money with $2000 as someone who had $10,000. As it's all in the pips and lots!
Now if I made it to a million dollars, whose more impressive? My original $2000 deposit making 20 pips a day. The 10k person is the "loser" in this rediculous debate.

In stocks I put in $10,000 and that's what I trade with, unless I mess around with nonsense margin rules. In forex I buy standard lots, and multiply that standard pips. If I needed $100k of my own money to trade, that's worse than the Nasdaq and no one will be here.

I think i disagree with you Why oh Why. It isn't necessarily gaining more pips that is important.

It also depends on drawdown, and the associated risk factors involved in determining the amount of capital you would lay on any individual trade.

if experience has taught me that 90% of the time a trade worth 20 pips is going to be successful, and that I would only lose 10 pips if I was wrong I might be highly tempted to risk 10 times the amount of capital than if I had a system which gave me 200 pips with a risk of 100, with a success rate of 90%. The rate of return and the drawdown in both circumstances would be identical.

say I place 10 lots on order 1 and 1 lot on order 2 and repeat each trade ten times.

one lot is equal to $10

scenario 1

($10 * 10 lots * 9 trades * 20 pips ) - ($10 *10 lots * 1 trade *10 pips)

= $17,000 profit

Scenario 2

($10 dollars * 1 lot * 9 trades * 200pips) - ($10 * 1 lot * 1 trade * 100 pips)

= $17,000 profit

The rate of return is identical, the risk factor and danger of drawdown are identical.

However in using scenario one I have banked just 170 pips. In scenario 2 I have banked 1700 pips.

I don't believe you can say the person trading scenario 2 is more profitable.

To illustrate more, lets enter one more variable.

Trade opportunity one happens 20 times a year. Trade opportunity two happens only 10 times per year.

we now have

Scenario 1:

($10 * 10 lots * 18 trades *20 pips) - ($10 * 10 lots * 2 trades * 10 pips)

= $34,000

scenario 2:

(1 lot * 9 trades * 200) - (1 lot * 1 trade * 100)

= $17,000

I have certainly earned more using scenario one.

However, I have earned 1700 pips using scenario two. Using scenario one I have in fact earned just 340.

I also know which trader I'd rather be.

A much fairer way of determining success is % increase of account balance and at what potential risk that increase was achieved.

Bump for good read!

You can actually make negative pips and still make a very good profit.

The best way to measure how good at trading a strategy/person is, I would guess, is to measure how many times their risk they return per trade on average.

I wouldn't worry about it too much, if you're making money (consistently) you're making money.

A good post, I certainly read nothing into pip totals without knowing their risk and SL levels.

To the OP: Pips are not everything by a long shot.

As mentioned by many already in this thread, pips only tell part of a story. Regardless of the number of pips gained or lost, a good trader can have a drastic affect on the $'s gained or lost. I can lose pips but still gain money (personally, the money is FAR more important to me that pips!).

I think many traders spend far too much time focused on pip totals. By doing that, they tend to ignore one of the most important aspects of trading - controlling your risk.

Let's say I'm going to place a trade with a stop at 20 pips and take profit at 20 pips. If I feel confident, I might risk 5% of my account on this trade. If I'm not quite sure, I might only risk 1% or less. With this in mind, I could lose 3 straight trades I'm not quite sure about and then win one that I have confidence in; I would still make a profit. In this case I would have lost approximately 3% from the losing trades and then gained around 5% on the win - net profit of approximately 2%. At the same time, I would have lost 40 pips.

In the end, the trader must play an essential role in determining their risk. Focusing on pips alone ignores this.

Copied from my blog:
So far this week has been very pleasing, Monday got the week off to a flying start and a 90 pip gain on the day. Quoting pip totals is actually one of my pet hates, I’ll explain why in a minute. Tuesday was also a strong day closing with +90 pips again. This time most of my gains were through a news trade and my new strategy I’ve been working on for a while which I’ve just gone live with for a small % risk compared to what I’ll be doing if it continues to show this great potential. I’ve been trading it on demo for 3 weeks and whilst demo trading is important, I feel there is no replicating trading with real money. You need to know how it performs under human interaction, emotions and so forth. On demo you have zero emotion and you can easily talk yourself out of a losing trade blaming it on x, y or z. Live accounts do not lie.
Anyway, onto why I dislike people quoting pip gains as a means to how successful a system/strategy is. Let me use two examples of two different strategies. Strategy A uses 3% risk and has a SL of 150 pips. Strategy B uses 3% risk but with a 50 SL. Strategy A makes a total of 1,500 pips a month…sounds amazing right? Whilst Strategy B made 750 pips. Joe public would pick 1,500 pips over 750 pips every day of the week based purely on the higher amount, I know I did when first starting. However, look a little deeper and do some simple maths and you’ll find it isn’t as straightforward as picking the higher total. I do the following to work out a % increase for any strategy. Divide the risk % by the SL which will give you a % per pip. For strategy A that gives each pip a value of 0.02%, for B it gives 0.06%. Triple the value. So strategy A made 30% over the month and B made 45%, a massive 50% better return. So before diving straight into something with astronomical gains, stop and have a little think and work out if it’s actually any more beneficial than something with less pips but have % value.


http://dubaitrader.wordpress.com/

That's a very good joke. You adjust your position size depending on your feelings.
Now, if you lose that 5%, what do you do? You wait for another feeling and until then you risk only 1% per trade?
Why not avoiding completely this strategy and risking only 2% when you really feel that the trade seems to be good?

The number of pips is utterly unimportant but you can't profit if the number is negative. The only way is to use some kind of martingale strategy but no serious trader uses it, as it is the shortest way to blowing an account.

@DubaiTrader: You're right but I'd be surprised if anyone would try to understand what you said. 95% on this forum are in the pips business. The other 5% make money.

You can profit if you have negative pips. I use 3 strategies for trading, 1 was showing a loss, 1 was BE and other was slightly in the green, however overall pip count was -15 pips for the month. But by using different risks for each strategy, I came out with a growth on my account. Just simple, smart MM.

A good example of making money but losing pips is DIBS. You risk x% whatever, but if your big IBs fail (generally do more) and your smaller IBs work, then you can lose pips and make money.

After 3 trades using 3 different strategies you can prove anything you can imagine.
But in the long run nobody wins by having a negative balance of pips. It is useless to argue about it. But everybody is free to believe anything.

A small IB has also a bigger chance of losing, as the stop loss is smaller compared to that of a long IB. It is true that you'll win more $ per pip if the IB is small but you will also win on less trades.
Considering that after one year of trading DIBS you have some profit I think that the number of pips is also positive.

Maybe I should remind everybody that I don't talk about your last trade. Put all your trades together and test if your assumptions are sound.

In my experience the smaller IBs have a great % chance of working then larger ones actually. Size of stop is slightly irrelevant here as it's not a random entry.

As for assumptions, I'm not assuming anything, I've said it's possible to make money and lose pips, you've agreed, I'm not disagreeing that most people make profit AND positive pips.

As said, if you're making money, you're making money, so it seemed obvious to me that the discussion was more of a purist argument then a practical one, maybe I was wrong.

Maybe I'll do a journal and showing losing pips and making profit, got a few eas that do that, been looking for something interesting to do.

I don't believe that the smaller IB has a smaller chance of being a loss. If this would be the case than one very good strategy for DIBS would be to enter only when the R:R is bigger than 1:3 for example. The rules are cut in stone so it is easy to make an EA. Food for thought, I'll make a quick test for fun.

"Feeling" was likely not an appropriate term in my earlier post.

That said, there are still times where I would, based on predetermined factors (pair volatility, projected potential rewards - fib extensions, distance to the nearest major support/resistance, distance to the nearest major round numbers, etc...), risk more or less on a specific trade than I normally would otherwise. I would NEVER base my risk decisions purely on a "feeling"; there would always have to be a reason.

In my opinion, a person's trading method needs to match their personality. I don't tend to see things as yes/no, black/white. As such, I don't view any given trade as necessarily good or bad. I believe that by controlling risk per trade, one can use risk as a trading tool in itself (i.e. as part of a system).

If that's the case, and I know it is for me, pip p/l is only part of the story.

It appears to me that everyone is more interested in the semantics of trading than in actually trading. Last I saw on my statements were pips gained and lost irrespective of my position size or sl.

Of course statements are quoted in pips, but how you manage those pips is a whole new ball game.

You could of earned 1,500 pips in a month, and I earn +500 and I could easily be ahead of you in terms of $ growth. Factoid!