Piping Ain’t Money

One of the most popular videos I’ve ever recorded for Youtube is called how to Scalp for 10 pips a day. My friend Rob Booker has an e-book on Amazon called Strategy 10 which is one of the all time best selling FX titles ever published that addresses some of the same issues. Both of our works try to satisfy the insatiable appetite for learning how to generate pips in the currency market. However the longer I trade the more I become convinced that this single minded focus on pips does more harm that good.

Don’t get me wrong. Pips are still the basic unit of measurement of return in our market. “How many pips did you make today?” is the common question all FX traders ask one another and nothing feels better than replying, “Dude... I banked 100 pips, before New York even opened!” Yet this emphasis on points is badly misguided. We don’t trade to make points. We trade to make money. By watching their pip production traders often lose focus of risk because more times than not they are trading on very high leverage.

Here is the typical thought pattern of a pip trader. “Hey I am only trading with a 20 point stop, so I can use 40:1 lever factor, no problem.” Of course this is a huge problem. Two things will happen. One, the trader will at some point decide to lift the stop on one of his many positions because he just knows that the trade will turn around. Two, there may be a massive gap move that blows right through the stop creating a much larger than expected loss. Trust me both of these events will occur if you trade long enough. That’s why focusing on pips is a mistake. Instead as trader you need to pay attention to money at risk per trade.

I have a simple formula I like to use and while it may not be suitable for everyone, it is a good start and it is certainly better than nothing. Let’s imagine I have $100,000 liquid net worth. I would use 10% of that or $10,000 for my trading capital capital. My rule of thumb is that after 5 consecutive losing trades I never want to be down more than 10% in my account. Given the fact that my standard setup uses 50 point stops that means I can’t risk more than $200 per trade which in turn limits me to trading 4 mini lots per $10,000 worth of capital. If I am very good and very lucky and I managed to bank 1000 points at the end of the year, I will have made $4000 per every $10,000 worth of trading capital. (This assumes I am trading dollar denominated pairs such as EUR/USD or GBP/USD. Pairs such as USD/CHF USD/CAD require some adjustment)

This approach will by no means make you rich overnight, but it will, under most normal conditions, keep you alive and in the game. And as Woody Allen once said, 90% of life is just showing up. The longer you trade the better you’ll get. Furthermore you’ll stop obsessing over pips and start thinking about money. Every trade will just become a $100 win or $200 loss. If you are an intra day trader like me, the advantage of this an approach will quickly become evident. No trade will take on a major significance of its own. It will just be one of many positions that will hopefully make you net positive at the end of the day.

Just remember. Trading is hard and piping ain’t money. By focusing on risk control you can hopefully hang around long enough to master the game.

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