Obsolete and inefficient concepts which we take for granted

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...

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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.

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I hope that some people may find this concept useful. Post your comments and ideas.

Very interesting, very important for intraday operations. I have written a small indi for MT4 that shows ATR/Spread ratio, you can configure display position and ATR period. Hope it helps.

Nice work, to both of you. The concept is worthy. If one is to be trading for any period of time, (months, years) This can help save, and thereby, earn.

Very valid point.
I have always maintained that pips should not be the measure of a trade. The important thing is the percentage or dollars gained or lost. If you keep the risk constant (e.g. 1 or 2%), it doesn't matter whether you have a 5 pip or 100 pip stop. The result is the same. I use a trade manager EA that I can set the risk and it automatically gives the lot size and RR depending on where you position your stop. It saves time and calculations.

I am using similiar concept, but with fixed daily range, not dynamically, because ATR is lagging. This can be problem in situation where big movement happens in few days, your ATR is going to greater value and after that is here side move and you are with big pip range.
For me it is better to take manually from daily ATR 20 this pips value for each pair.
Example, for GU you take something like this:


See, it is about 120 pips that can be expected as average.

When you need 70% from this, pips=120*0.70=84
Or you need 200%, pips=120*2.00=240

Or you can just use longer period for the calculation of ATR. Instead of 20 days, use 100 or even 200 days.

Hi alphaomega!
(sorry for replying to a thread relatively late!)

You are absolutely right that a pip is kind of a big approximation!
Correct me if I'm wrong but when talking about changes in pips We are telling about absolute change.
And if we are talking about %change, or like in Your idea ATR pips, we are telling about relative change.

Forex market is very often based on big leverages =>100. When traders trade with such leverages they often "hunt" for relatively small changes of price. In such cases value of a single "pip" on the beginning and on the end of that trade is quite the same.
Absolute measuring is then a bit helpful, because when a trader knows what is a value of a single pip change after leverage, he can make a simple multiplication to get an image of possible gain or loss value.

For traders that are trading on monthly and weekly charts, and who are calculating much bigger price movements, the pip is like U said, useless.

I think that You have much more "Obsolete and inefficient concepts which we take for granted" in Your head, so I hope You will share more with us! I'll be observing this thread with big interest.

Best Regards

Hi will you be kind enough to shear the code you used for indicator here please, some of us are using MT5
thank you

Another member reactivated this thread, which moved it back to the top of the forum lists. Sorry for responding to an ancient thread.

The most robust method when working with data with occasional "outliers" is to work with median values, instead of average values (i.e. sort all previous 200 days and pick the middle value).

Disadvantage is the discrete nature of the median (it can suddenly jump to a next value). To counter that, some people use a slightly modified median: they discard the upper and lower 30% of values, and calculate the average over the remaining 40% values (arbitrary percentages you can tune based on amount of outliers).