This post is a guest post
The internet is saturated with cheap marketing and advertising ploys aimed at reeling in new forex traders. Most of them promise huge returns with the promise of thousands of pips per month. Many of the marketing schemes on the net boast things like, “Learn how to make 100 pips a day!” or “Our trading strategy yielded 2,000 pips last month!”
First of all, there are all sorts of ways these numbers are fabricated, but the reality is that pips don’t really matter. In this article, we are going to discuss why, and then we are going to discuss what really matters.
How To Make Pips And Lose Money Every Day
Let’s break down a typical trading day for Joe Forex Trader. Joe opens his charts in the morning, conducts technical analysis for a few minutes, sees the market beginning to move, and jumps in with a new market order. When Joe gets into the market, he’s not exactly sure where he will get out with profit or where he will place a protective stop. Therefore, Joe’s position size is not based on anything but how he feels or what size position he typically takes.
Let’s assume that Joe buys $100,000 EUR CHF and, for argument’s sake, let us assume that each 1 pip movement is $10. Shortly after Joe enters the market, price begins moving against him aggressively, and suddenly Joe is down 30 pips. Thus, Joe decides to cut his loss, so he closes out the position for a loss of $300 ($10/pip X 30 pips).
Joe is now a bit perturbed that the first trade of the day was a loss, so he looks at the market and sees a potential scalp setup. Joe decides to run a super tight stop of just 10 pips, so he increases his position size to $400,000. He thinks that with just a quick 10 pip scalp he can earn back the money he just lost and get back into positive territory on the day. Joe buys $400,000 of EUR USD, and all of a sudden price spikes hard against him. Joe is down 10 pips in a matter of seconds. He finally closes out the trade at a loss of 12 pips. Joe lost $480 ($40/pip X 12 pips) on the trade. Now, Joe has lost $780 on the day, and he has lost a total of 42 pips (30 + 12).
Joe decides to take a break for a few minutes. He grabs a drink, gets some fresh air, comes back in and begins to analyze the market again. This time, Joe sees a great setup that could yield around 50 pips, but Joe’s psychology is under stress and he is a bit fearful. He doesn’t want to go into any deeper of a drawdown on the day, so Joe opens a position of just $100,000. If price moves against him 20 pips, Joe will get out. Therefore, he buys EUR USD again with $100,000. This time price begins to move in Joe’s favor. In just a matter of about 30 minutes, Joe closes out his trade with a nice 50 pip profit and makes $500 on the trade ($10/pip X 50 pips).
Now, Joe has made 50 pips on the day and he has lost 42 pips, which means he is net positive 8 pips on the day. But what about the money? Joe is actually down $280 ($780-$500)! This is why pips don’t really matter at all. All that matters at the end of the day is if a trader has made or lost money. If a trader loses pips, but makes money, that’s great. However, if he makes 100+ pips on the day, but loses money, then those pips don’t really matter anything do they?
The moral of the story is that position sizing is a huge key to long-term trading success. Consider risking the same percent on every trade instead of executing subjective position sizes based on emotion. Forex trading does contain a significant risk of loss and education, professional advice and choosing the right broker are things all traders must consider.