Why Even Calculate Pips
March 8, 2007 by Trader Rich
Here is a comment that was received yesterday about the pip calculation issue:
"If you buy 2 lots at the same time and you sell one lot for a 10 pips
profit and the second lot for 5 pips profit, in my book that would be
15 pips profit. From what I'm hearing in other people is that the
profit on this trade would be 7.5 pips…that doesn't sound right to
me. What do you think?"
So there are traders in two camps on how to perform pip calculation. One camp says that the number of lots should not affect your pip calculation and the other says it should. I truly don't know the answer to this but I think it's a moot point. After all, most of us aren't reporting pips as a way to get people to sign up for a signal service, at least I'm not.
I think the answer to this is brought up by Ed Mamula in which he thinks forex traders "have an odd habit of reporting how many PIPS they have gained or lost." He says that what's important aren't PIPS but dollars and percentages. Good point Ed. Read Ed's thought's on this.
I bring up Chaffcombe the trader sometimes because I personally believe he is for real. If you browse around his performance charts and discussions, he doesn't mention pips at all. He's really concerned about the percentages. http://www.futurestech.com.au/MonthlyReport_Jan2007.htm
So it will be my goal to start speaking in percentages more in the futures and not pips so much. I still have to re-work my performance reporting to reflect this.
Mark commented on this post and answers the question. "Pips are a good way to discuss trading profits because they are independent of your risk profile."
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Pips are a good way to discuss trading profits becasue they are independent of your risk profile.
Thanks Mark.. Great point. I’m going to add this to the post.
No, the commenter has it completely wrong. If you buy 2 lots at the same time and you sell one lot for a 10 pips profit and the second lot for 5 pips profit, Rich was previously calculating that at 25 pips (2 lots@10 each, and one at 5)
This would be correctly calculated at 15 as the price has only changed 15 pips regardless of how many lots that one has on..
I have no idea where he gets 7.5 pips from…
this is an interesting question. The problem arises from the lot sizes of the three common account types- standard, mini, and micro. Consider one trade from a mini account where a single position is opened by buying (or selling) 10 lots (10 X $10,000) of GBP/USD and another trade from a standard account at the same position with 1 lot (1 X $100,000). Now let\’s say both trades hit their 30 pip targets. Both traders profit $300. The exact same amount of money is in play in both cases, the market moves the exact same amount, and the profit is the same. But the guy with the mini account is inclined to say he is up +300 pips (10 lots X 30 pips) while the standard account guy is looking at being up only +30 pips (1 lot X 30 pips). The reason I think this happens is because we become accustomed to trading in 1 lot sizes for whatever account type we have. In that 2 lot example Rich quoted in his post the first problem is that they could not have been opened \”at the same time\” or else they could not have closed at different prices. So those are two individual trades. If those trades came from a standard account it would require that a mini trader had 20 lots perform the same way to be equivalent. The only way I can see to standardize performance across account types is to simply report a profit to loss ratio for whatever time period seems reasonable. In that way performance can be reported without actually disclosing any personal financial information.
hmm that’s the second time it has listed me as anonymous. that’s my post above. My name is Chad, handle molbio1. Been reading for a couple of weeks and think your blog is great.
With all due respect to the thorough description in the previous post, I must continue to disagree. In fact, there is no question here at all. If I buy at 1.9550 and I sell at 1.9600, that is 50 pips. The price has moved 50 pips. Pips are not the same as profit.
* Pips are an objective measurement of price movement! *
To carry this analogy over to stocks: If AAPL moved from 85 to 90 today, it moved 5 points. Regardless of whether I had 1 share or 10,000, that stock moved 5 points. If you were the owner of those 10,000 shares of AAPL, Would you say that your stock went up 50,000 points today? Of course not!
I also have started thinking in terms of percentages and will change to this way of reporting anything. Firstly because you don’t have to reveal your dollar amounts (which I think is like revealing your underwear; notice how Chaffcombe converts his percentage performance to a fake dollar amount before revealing it to the public). And you also don’t have to talk about your leverage amounts etc - percentages are the best solution…
Thanks for the link, Rich. When we want to become better traders, we really mean that we’d like to experience more profits and less pain. Thinking in terms of percentage gain and loss ties the market movement to your trading decisions, and personalizes the results. Speaking in pips really only makes sense when we want to describe the market’s movement, and even then, we should put the market’s move in percentage terms…after all, which is bigger? A 100 pip move in EUR/USD or a 100 pip move in GBP/USD? Well if you’re thinking in terms of the trading instrument (1 standard FX lot), I guess the answer is that they are equivalent, but if we’re talking about the currencies themselves, a 100 pip move in the EUR/USD is “bigger” because it represents a higher percentage move. (At least at the time of this writing…)
Now I could be totally missing something, but assuming that the goal is to provide an objective measure of trading performance, it seems to me that what we are trying to achieve by converting to percentages can be achieved perfectly well by sticking with pips. It is useful to use percentages in the case of stocks because a $5 gain on a $50 stock is worth much more than a $5 gain on a $100 stock. However, in forex we deal in lots that are about as equal in value as practially possible. So, a 5 pip gain on a lot of eur/usd is worth a similar amount to a 5 pip gain in usd/jpy. If we could standardize stocks into lots and points, then we would have essentially the same system that we have in forex now. For example, I could say simply that I had a 5 point gain in 1 lot of IBM or Alcoa or whatever, where one lot equaled a certain dollar-amount of of the stock, rendering the share price irrelevant. In forex, we are all concerned with overcoming spreads (commisions) and realizing a profit on every position, regardless of the size of our bankroll or the size of our position. Listing our performance in pips is a convenient way to state our profit or loss on a certain trade - commisions included, and number of lots (and amount of capital not in this position) irrelevant - which I think is all we really are interested in. To this end, I would side with the 7.5 pip interpretation stated in the article. Again we are interested in your trading performance, not the exact amount of money you made. If you sold half your position at a 10 pip profit, and the other half at a 5 pip profit, well then, you as a trader, by dividing your position and selling at different times, banked an average of 7.5 pips based on your trading system. That\’s what we really want to know. We do not know or care how many lots were involved or if they were million-dollar lots or ten-thousand dollar lots. For example, suppose another trader had bought 4 lots and sold 2 at a 10 pip profit, and the other 2 at a 5 point profit? Would his profit then be 30 pips? Is his system then twice as good as the other trader\’s?… the one claiming 15 pips? Of course not. Calculating pips that way would be akin to a stock trader multiplying his percentage gain by the number of shares that he carried. I would also like to add that in order to realize our goal of evaluating trading performance objectively, forex traders using commision-based brokers with low-pip spreads should subtract the pip-equivalent of the commision from their reported trade performance… They could add something like \”commissions included,\” or, \”minus about 2 pips in commissions\” at the end of their statement of how many pips they made on a trade.
Sorry… that rather long opinion above is by me - Pip Heaven - not Forex Trader.
responding to the poster trying to equate the stock market with the currency market, I\’d like to point out that points in the stock market are reported with reference to the dollar (assuming he is talking about the U.S. market). So, sure, it is correct to say that AAPL (or any of about 8000 stocks) moved 5 points, but, in terms of communicating how effective your trading strategy is, you would only compare real profits against real losses. A major distinction between the stock market and the currency market is that your typical retail trader in the stock market is trading 1:1 (i.e. not on margin) while in the currency market we all trade on margin. That means that I can view a +5 point change on a stock that I own as real equity or collateral in a situation where I am trying to get a bank loan for a real estate deal. But in the currency market I really can\’t say that the Yen/Pound/Franc I *own* is a true commodity since all I really am doing is managing that currency on margin. The only thing that matters is my profit or loss when I close my position. It doesn\’t matter what unit I use to assess that gain or loss. Maybe, for me, Top-Flite golf balls seem to be the most *real* currency on the planet. You may or may not know what a golf ball costs in different countries around the world, but if I express my trade performance as a ratio you don\’t have to. Good subject
They use percentages in every other market. It\’s the only objective consistent measure you can use to compare performances. Also pips in one currency are not the same as pips in another currency. For me pips have absolutely no meaning at all.
[quote=Forex Trader]No, the commenter has it completely wrong. If you buy 2 lots at the same time and you sell one lot for a 10 pips profit and the second lot for 5 pips profit, Rich was previously calculating that at 25 pips (2 lots@10 each, and one at 5)
This would be correctly calculated at 15 as the price has only changed 15 pips regardless of how many lots that one has on..
I have no idea where he gets 7.5 pips from…[/quote]
Actually I never calculated pips like this. If you buy 2 lots at the same time and sell 1 lot for 10 pip profit and a second lot at 5 pips profit, I calculated it at 15, never 25.
Personally, I like using ROI as it\’s a standard gauge to see how my portfolio is performing over a period of time.
It removes all variables like the amount of leverage on the account (400:1, 200:, or 20:1), type of account (trading in lots of 1M, 100K, 10K or 1K) or commission structure.
Whether you trade casually or full-time time for a living, you are an investor making money with some initial starting capital. Investors look at ROI so that you can compare your performance across several asset classes - stocks, options, futures, real estate, a business or simply putting it in the bank.
Pips are equivalent to saying my cars gives me 200 miles on a tank of gas. Great!!! Now lets standardize it with miles/gallon and you can compare performance across different vehicle classes - a mini-cooper to a mack truck.
Pip Heaven is concerned about commissions, but that is just the cost of doing business. If you\’re paying interest on a credit card bill you dont say that your actual balance is a lot less - it\’s the cost of borrowing (or doing business). As a trader you decide which broker you trade with knowing their commission structure up front. So at the end of the day other investors are interested in knowing how you did with the money you invested - ROI makes it meaningful to have that comparison.
This new commenting software is tricky
Anyway, the above comment is from me.
What I think most of us we really want is to know is trading strategy. And for that we need to know how each other do ON THE TRADES that we take not on our entire accounts. For example, I might talk about making 15 pips last night. Yeah, I could have bet the farm, used 400 to 1 leverage, and made a million bucks on that trade (producing an astronomical ROI), or I could have already been a millionaire and bet only one micro lot and made 15 cents on that trade (giving me an ROI near zero). However, since I am not starting my own fund, you wouldn\’t really care whether that trade made me a millionaire or not. What you care about is how I made 15 pips on that trade… Was there a news report that I listened to? Was there a chart set up that I saw? Etc.
When I read about how a trader made 15 or 20 or 100 pips, I never find myself wanting to say: \”Yeah, but what percent of your account did you place into (risk on) that trade?… What\’s your ROI?\”
In fact, percentages seem to be misleading too. For example, someone mentioned before that one pip of eur/usd is actually a greater percentage gain in the euro than one pip of gbp/usd is to the pound. However, if I remember correctly (I might be wrong) one pip of eur/usd is actually a smaller PROFIT than one pip of gbp/usd. So… what percentage do you want to go through the hassle of calculating for every trade? The percentage gain in the currency? The percentage gain in your account (which is affected by how much money you had in your account when you executed the trade)? Or… the percentage gain on your trade (by what percent did each thing that you bought increase in value)?
I think it\’s the trade. And, as I said before, it seems that pips are a way of very roughly approximating the percentage gain on a particular trade without the hassle of actually calculating percentages. They are not the same for every pair, but they seem consistent enough for most people\’s purposes.
But the main reason for me that pips make sense to me is not even that they represent a rough percentage gained or lost on a trade - because they really are only roughly consistent from pair to pair. The main reason that talking in pips makes sense to me is that they are the unit by which we win or lose in forex trades. We are not allowed to lose by half a pip (ok… usually). When discussing trade strategy, we want to know whether or not you held out for that extra pip - whatever it\’s percentage value - and why… and what the consequences were.
Also, responding to Ali V., it is true what he says about commissions and spreads being part of the cost of doing business. However, I think that most people find it intuitive to talk about how much you bought a currency for and how much you sold it for. This, naturally includes your spread. When you do that, your \”cost of doing business\” is sometimes fully included in that spread (\”commission free\” broker with a larger spread) and sometimes not fully included (\”commission based\” broker with a tiny spread). When it is not fully included (\”commission based\” broker) it is easy to fool yourself (and others) into thinking that you are doing better than traders using \”commission free\” brokers are, when in fact you are doing the same.
It seems that to make our discussions of trade stratagy accurate we should consistently fully include the cost of doing business by admitting to other traders that in your case, you were able to come out 2 pips farther ahead because part of your cost of doing business was hidden in the form of commissions, not spread. Or, to do it Ali\’s way, everyone should always add the spread back onto the gains (or losses) they made in the trade - to consistently remove and keep private the cost of doing business from all…