News & Analysis at your fingertips.

We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

0

Notifications

Notifications below are based on filters which can be adjusted via Economic and Webinar Calendar pages.

Live Webinar

Live Webinar Events

0

Economic Calendar

Economic Calendar Events

0
Free Trading Guides
EUR/USD
Bearish
Oil - US Crude
Mixed
Wall Street
Mixed
Gold
Bearish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
GBP/USD
Bearish
USD/JPY
Bullish
More View more
Real Time News
  • The Australian Dollar may extend its slide lower despite the planned easing of Covid-19 restrictions, as the market continues to price in an RBA rate cut on October 6. Get your #currencies update from @DanielGMoss here: https://t.co/HJpngnerzY https://t.co/g6X8ABQDwY
  • The Indian Rupee may be at risk to the US Dollar as USD/INR attempts to refocus to the upside. This is as the Nifty 50, India’s benchmark stock index, could fall further. Get your USD/INR market update here:https://t.co/ed4QR7QQOn https://t.co/gDWYNtm2UY
  • Technical indicators are chart analysis tools that can help traders better understand and act on price movement. Learn more about the importance of technical analysis here: https://t.co/NpC1D8y4Aa https://t.co/Q7TcbrYXjl
  • #Gold prices have plunged nearly 11% off the record highs with a breakout risking further losses. Here are technical trade levels that matter on the XAU/USD weekly chart. Get your #metals update from @MBForex here: https://t.co/7p3jPx6nQd https://t.co/yxymjCHti6
  • Traders tend to overcomplicate things when they’re starting out in the forex market. This fact is unfortunate but undeniably true.Simplify your trading strategy with these four indicators here:https://t.co/A4dqGMPylo https://t.co/yZzArpGs2h
  • GBP turbulence persists as investors eye the next round of EU-UK Brexit negotiations. Cautious optimism signals a deal is near. Get your #currencies update from @JMcQueenFX here: https://t.co/WjU4oYpmf7 https://t.co/VcNnCjm0B2
  • An economic calendar is a resource that allows traders to learn about important economic information scheduled to be released. Stay up to date on the most important global economic data here: https://t.co/JdvW6HNuqV https://t.co/AiLoS7DrEQ
  • Many people are attracted to forex trading due to the amount of leverage that brokers provide. Leverage allows traders to gain more exposure in financial markets than what they are required to pay for. Learn about FX leverage here: https://t.co/3Wked6GBOp https://t.co/HicBmGrokK
  • There is a great debate about which type of analysis is better for a trader. Is it better to be a fundamental trader or a technical trader? Find out here:https://t.co/7kPzAoNoLG https://t.co/5lbyBJeeA7
  • Entry orders are a valuable tool in forex trading. Traders can strategize to come up with a great trading plan, but if they can’t execute that plan effectively, all their hard work might as well be thrown out. Learn how to place entry orders here: https://t.co/lAFyv1gM0P https://t.co/ubLimoYAcr
Trading Lesson of 2015: Pips Don’t Matter, Money Does

Trading Lesson of 2015: Pips Don’t Matter, Money Does

2015-12-17 22:00:00
Ilya Spivak, Head Strategist, APAC
Share:

As a longer-term trader, I am frequently asked about how I can stomach risking hundreds of pips on a single trade. I am quick to point out that it is Dollars and not pips that truly matter. After all, a 500 pip loss on a 1k EURUSD position ($50) is far more tolerable than a 50 pip loss on a 100k position ($500). The steady stream of reminders of this basic logic did not help safeguard against a major oversight in my risk management strategy however.

My approach to trade selection begins with cultivating a 6-12 month fundamental outlook that informs which currencies I want to be long, which ones I want to short, and which I want to avoid altogether. From there, I use technical analysis to fine-tune entry and exit prices as well as manage risk. Timing was an early pitfall of this approach. I often traded on fundamental hypotheses before the markets gravitated to their realization. This had me stubbornly holding trades that were not working because I believed in the narrative rather than listening to price action.

In the spirit of Yra Harris’ sage advice – “If you’re right at the wrong time, you’re wrong” – I adjusted by introducing a forced take-profit clause into the system. I would take profit on half of any position once the first technical objective was met and trail the stop-loss to breakeven on the rest, allowing it to play out whatever big-picture fundamental theory with risk largely off the table. I also resolved to accept no worse than 1:1 risk/reward on the initial setup on the premise that as long as my process had a positive edge, this would be profitable over the long term. The problem however, was that I measured the risk/reward ratio in terms of pips rather than Dollars.

This was not initially an issue. For example, the system worked great in 2014 when the US Dollar trended strongly, making for significant follow-through beyond a trade’s first target. With a 65 percent win rate, this generated healthy returns. My ability to pick trades seemingly improved in 2015, with the win rate rising to 73 percent. Nevertheless, returns suffered, with realized year-to-date gains trailing significantly behind that of the prior period.

Why did this happen? The markets turned choppy in 2015, with many more trades reversing to stop out at breakeven on the second half of a position after booking small gains on the first. So, while the number of losers relative to winners was smaller in 2015 than 2014, their size was on average larger. It was then that I realized what was happening: on a hypothetical 10k trade with a 50 pip stop and a 50 pip first target where I would book half of the position, I was initially risking a Dollar loss twice the size of the gain.

The lesson here is simple: it is always best to think in terms of money and not pips. Had I done that initially, the adverse skew in my risk/reward strategy would have surfaced. I have now adjusted my approach to accept no less than 2:1 risk/reward in pip terms. This means that on the same hypothetical 10k trade, the 50-pip stop would need to be matched with a 100-pip first target since profits would only be taken on 5k of the position. This way, a true Dollar-based 1:1 risk/reward ratio is achieved, making for a promising strategy if I keep the win rate in the 60-70 percent range.

See the next Top Trading Lesson of 2015: Staying Too Close to Market Can Be a Bad Thing

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES