It constantly amazes me when talking to
traders and they work out profit or loss in pips. A common question I get asked
is “how many pips should I make trading price action” Or another
example is “should I have a minimum pip profit target each month?” What the
traders asking these questions fail to understand is pips don’t determine
whether you are profitable or not.
Negative
Pips but Positive $
The
reason traders need to stop working out profit and loss in pips is because pips
are deceiving. Traders can be negative pips over a few trades but can still be
making money. To some reading this they will be wondering what I am talking
about so stay with me as this is article is definitely for you!
Before
we enter trades we should be working out the correct trade size. We should
always be risking the same percentage of our trading accounts on every trade.
The only thing that will change is the stop size. Depending on how big or small
the stop size is will determine how big the trade is we need to put on.
By
doing this we will be risking the same percent every trade, no matter how big
the stop loss is in pips. This means that every trade we enter will be a
different amount.
Many
traders simply see a trade and enter the same size trade regardless of the stop
loss or pair they are trading. This is very dangerous because placing the same
size trade every trade does not mean we are risking the same amount of money
every trade.
The
stop size for each trade will change dramatically. We could have a 20 pip stop
on the 1 hour chart but a 200 pip stop on the weekly chart. If for example we are
entering both these trades with the same 2 standard contracts the amount of real
money risked in both trades will vary massively. The loss the trader would take
on the weekly trade is 10 times the size the loss they would take on their 1 hour
chart trade.
Correctly
Calculating Positions Size
Most
traders work out their risk per trade using the 3% method. What this basically
means is each trade no matter what the pair or stop size, they are willing to
risk 3% of their trading account capital. One trade may have 30 pips for a stop
size but another trade may have 150 pips stop. In both trades using the 3%
method the trader will be risking 3% of their account total.
Using
this method the trader will have to open a different amount for each trade, but
they will still be risking the same percentage of their trading account.
To
work out the trade size the trader needs to put on for each trade I recommend
using a position size calculator. There are many of these that can be found on
the internet. Simply Google “position size calculator”. This tool will look like
this:
Start
Thinking in Money Terms
Now
you have learnt how to open the correct size trade it is important you start
thinking in terms of money and not in pips. As I said at the start of this
article you could be negative pips for the month but making money!
An
example of this is you place two trades. Both these trades are risking 3% of
your account. On trade 1 you lose the trade that had a 200 pips stop. You are
now -3%. You then open a trade on the 1 hour chart and have a stop of 20 pips.
You win this trade and make 40 pips or double your risk which would be +6%. So
whilst overall you are down 180 pips you are still positive 3% in your trading
account!
As
you can see from the above example working trades out in pips makes no sense.
Start working out each trade using a position size calculator and never over
risk on any one trade. It is still important to track your pips made and lost
but it does not determine whether you make or lose money.
Now you have the knowledge of how to
correctly manage your trade size there is no reason to ever over risk on any one
trade. There is also no excuse to not place trades because the stop loss is too
large. As you have just learnt it doesn't matter how big the stop loss is
because you will be simply altering your trade size depending on how large the
stop is.
Thanks for your
time.
No comments:
Post a Comment