Do you measure your Forex success in Pips or Percentages?
In this video:
00:30 – Money management and Risk
00:50 – How important are Pips?
01:30 – Percentages are the same regardless of your account size
02:15 – The problem with counting success in Pips
03:20 – All trades should have equal risk
03:52 – Download my Forex Calculator and use it – It’s Free!
04:30 – I’ve taught people from all over the World how to trade Forex
05:20 – A +2.3% account gain this week
05:50 – Help eliminate emotions and stop blowing your account
How do you measure your success as a Forex trader? Do you look at the number of Pips you make, or do you look at the percentage return on your account you make? Let's talk about that and more right now.
Hi traders, it's Andrew Mitchem here, The Forex Trading Coach. Today is Friday the 12th of February. I want to talk about a really topical subject.
Money management and Risk
I've had quite a lot of emails this week from people asking about money management and risk. I've also had quite a few emails from people saying, “Andrew, look, you know, I've made my account go from $1000 to $5000 and then I've blown it all in one day. I get that type of email quite often. What it shows me is that there are so many people out there who don't understand correct money management.
How important are Pips?
Unfortunately, when you look around online the vast majority of people tell you to measure your success of any strategy or years as a trader in terms of the number of Pips you make. I personally believe that that is not correct. I'll give you some examples of why. Just to quickly read out an email here that someone sent to me. “Hey, Andrew, can you tell me why I express my success in percentages and why I think that's better than Pips?” This person says, “Percentages depend on the account and, actually, say nothing about your success whereas Pips show you what's going on right now. That's from Jera Flow.
Percentages are the same regardless of your account size
I'm not sure that it's quite right, because for me a percentage is a percentage. It doesn't matter, regardless of your account size. As an example, this week right now I'm up 2.3% on my account right now. If I had a $10,000 account that means I've made $230 this week. If I had a $100,000 account it means I've made $2300 this week.
It's still the same amount. It's the same amount risked. It's the same amount in terms of percentage gain made. The only thing that makes the difference between actual monetary value is the size of the account, but I'm still risking the same amount on each of the two accounts, and I'm still making the same amount on each of the two accounts. To me that's a far better way of being profitable than by looking at the number of Pips you make.
The problem with counting success in Pips
The problem is, let's say you took many trades on shorter time-frame charts, say like one-hour charts, 15-minute charts, and you made lots of small profitable trades, let's say. You made 10 Pips, and 15, and 20, and 30, etc., those sort of smaller amount of Pips. The thing is then you go and take a trade on say a daily chart and it loses 100 Pips, so that one trade that goes wrong completely outdoes and takes away from all those gains that you've made on all those shorter time-frame charts on lots of really good successful trades. You may have 80-90% win rate within your trading in terms of your profitable trades, but that way of trading in terms of looking at the number of Pips you've actually gone backwards and lost money.
Whereas, if I had an equal risk on each one of those trades, regardless of it's profit target and regardless of its time-frame chart, for instance, then if I can make let's say half, or let's say I'm risking half of 1% on each of those trades but I'm making somewhere between 1, 1-1/2, even 2% gain if it's a full profitable trade.
All trades should have equal risk
You can see how those smaller time-frame trades and the bigger time-frame trade, as in the daily trade that had 100 stop-loss, all of them become equal. Each of them, it doesn't matter what the currency pair is, what the time frame of the chart, they all have equal risk and, therefore, if they hit their profit targets, depending on the reward-to-risk of those trades they will make a percentage gain on my account regardless of the number of Pips. It's really important to understand that point.
Download my Forex Calculator and use it – It’s Free!
If you struggle to understand that what I strongly suggest you do is download my free Lot Size calculator that's available on my website. Get hold of it. It's a brilliant tool, brilliant tool. It's been downloaded tens and tens of thousands of times over the last probably five years that it's been available. Just the feedback that I get from it is just absolutely wonderful because people suddenly realize that what they were doing before and what their sort of internet world of forums and get-rich-quick schemes tell them in terms of make X-number of Pips, most have realized that once you understand correct position sizing, and money management, and wealth risk, the number of Pips you make really is pretty irrelevant.
I’ve taught people from all over the World how to trade Forex
That's the way that I trade myself and I‘ve traded very successfully for the last eight years or more, and I've also taught people from all around the world for the last six years using that exact same money management method. Believe me it's one that really does make a huge difference to trading because it helps you to try to eliminate as much as possible the emotional side of trading, because you know the very worst that you can risk on one trade, and you know that each trade is equal. What you don't want to do in your trading is suddenly be fearful of a trade that's on there. Let's say you're working the Pips method and this one trade has a 50 Pip stop-loss yet most of your other trades have a 20 Pip stop-loss, and you're fearful of what this one with a 50 if it loses it's going to outdo two or three of the other trades. That's the problem when you're looking at measuring your profits in Pips.
A +2.3% account gain this week
A percentage applies to any account, any size. Think of it this way, 2.3% account gain just in this one week and I still have Friday, today, to go. That's probably as much as any bank in the world's going to pay you right now for a standard interest rate on a saving account. It just shows that with controlled risk, high reward to risk trade, and risk your account and your new trades in terms of percentages.
Help eliminate emotions and stop blowing your account
Do it that way and it will really help you from having bad emotions in your trading, and it also helps … There's too many people out there that are blowing their accounts, that are just risking too much on one trade, or making a fortune and then blowing it all. It's not a great way of trading. It's a very unprofessional way of trading. Think about that slightly differently. Go and get that Lot Size calculator, if you don't have it already. As I mentioned, it's on my website. I really encourage you to do that. It's free of charge and it will help change your trading around.
Once again, this is Andrew Mitchem, from The Forex Trading Coach. Have a wonderful weekend and I look forward to talking to you this time next week.