The Problem with Counting Pips

Filed under: Learn Forex Trading |

If you’ve been looking into trading forex, you have probably already come across the term “pip”. “Pip” stand for “Percentage in Point”, and it is the smallest price increment in forex trading. What does this mean? Well, if the exchange rate between the British pound and the US dollar has risen from 1.55800 to 1.55900, then it has gone up by one hundred pips. Or, if the exchange rate between the US dollar and the Japanese yen has gone down from 77.050 to 77.000, it has fallen by 50 pips. Get the picture?

 

If you have been looking at forex signals service providers, you have probably been impressed with the amount of profit, in pips, that some of them are claiming. However, these kinds of figures can be misleading. For example, if you have a very wide stop loss of, let’s say something ridiculous like 10,000 pips, and you eventually make a profit of 1000 pips, then the result on paper looks very good. With a risk reward of 10:1, you could go on for quite some time picking up 1000 pips each time, but eventually, that one loss will wipe out all of the profits. At the end of the day, pips are meaningless and it is money that is important. That is why we trade – to make money! So money is what we should count; and we would never risk ten times our reward where money is concerned.

 

The amount of pips at risk or that you might get are irrelevant. What matters is how much money you are risking, and how much money you might get if the trade comes off. For some reason, traders continue to count their success or failure in pips, and brag about how many pips they have got this week or this month. My advice is to forget about pips except during the calculation required to work out your lot sizes. It is money that matters, not pips… so don’t lured by the glamour of the pip!

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>