As traders our aim in life is to make money. It sounds very simple but there are 101 ways that you can be “misled” by what you read online and many things may not be quite as good as they first seem.
So, today, I thought I should explain a bit more about why not all pips are equal and I’ll show you how you can make 100 pips and lose money….. and lose pips and still make money. Sounds crazy ?? Well, when you start trading you need to go in to it with both eyes open and truly appreciate why you need to do your own back testing.
So, lets start with a few basic principles:
When you are trading you will either be placing your stake in £ per pip or by lot size. If you are trading by lot size most forex brokers allow you to trade a minimum of 0.01 lots, this will equate to a set number of pence. For example EURUSD at 0.01 lots is about 7p per pip movement on IC Markets. So, if you traded 0.1 lots that would be about 70p (£0.7) per pip. You need to know this value for your broker and the instrument you are trading.
Your risk is based on this £/pip value multiplied by the stop loss (in pips) of your trade. For example on EURUSD trading at 0.01 with a 50 pip stop you would be risking approx £3.5 of your account balance if it hit stop. If you traded at 0.1 lots your risk would increase ten times to £35.
Now let’s move on and I’ll show you how you can make 100 pips but lose money.
To keep this simple we are going to take nine trades the first eight make a profit and the last one loses. This is based on EURUSD at £0.07 per pip for a lot size of 0.01.
| Trade Number | Stake Size (Lots) | £/Pip | Pips Profit/Loss | £ Profit/Loss | Running Total (Pips) | Running total (£) |
|---|---|---|---|---|---|---|
| 1 | 0.01 | 0.07 | 15 | £1.05 | 15 | £1.05 |
| 2 | 0.01 | 0.07 | 15 | £1.05 | 30 | £2.10 |
| 3 | 0.01 | 0.07 | 15 | £1.05 | 45 | £3.15 |
| 4 | 0.01 | 0.07 | 15 | £1.05 | 60 | £4.20 |
| 5 | 0.01 | 0.07 | 15 | £1.05 | 75 | £5.25 |
| 6 | 0.01 | 0.07 | 15 | £1.05 | 90 | £6.30 |
| 7 | 0.01 | 0.07 | 15 | £1.05 | 105 | £7.35 |
| 8 | 0.01 | 0.07 | 15 | £1.05 | 120 | £8.40 |
| 9 | 0.15 | £1.05 | -20 | -£21 | 100 | -£12.60 |
So, at the end of this I have made 100 pips…. but I’ve also lost money !
If I was an unscrupulous person who wanted to sell you a strategy or a trade signal service I could quite honestly say that I had made 100 pips. What you would not necessarily realise is that if you had done the identical trades you would have lost money. So, pips on their own are only part of the story. To make a meaningful decision on the profitability of any strategy you need to know the stake size traded for each trade. In addition to this, as I covered in my previous blog post, prices and charges vary per broker and account type. So, if you want to know if a strategy would work for you then YOU must back test it on your own account with YOUR broker.
I will also add that the inverse of this is also true. You can lose pips in total overall but, depending on your stake size per trade you may still be profitable.
If you only take one thing from this article – Pips are vanity, PROFIT is sanity !