Why do we measure success in pips?

I’ve gotten into a discussion on another thread about this, but as it’s getting off topic I thought I’d start a new one and ask everyone else’s opinion on the matter.

Isn’t it misleading to new traders to discuss the profitability of a particular trader, or a particular system, solely in pips? I see people claiming their system makes �x pips per day� (I’ve been guilty of this as well) but they never seem to tell you what those pips are worth, or how much you need to risk to get those pips. A pip is a variable unit, it can be worth a penny or a thousand dollars. You can be a pip positive but dollar negative trader, and vice versa, depending on your risk/reward ratios. Here’s some math to demonstrate this…

Assume all trades are at 1% risk.

Account Balance = $1000
Trade #1: 100 pip stoploss, 100 pip takeprofit. You lose for -100 pips (-$10).

Account Balance = $990
Trade #2: 10 pip stoploss, 10 pip takeprofit. You win for +10pips ($9.90).

Account Balance = $999.90
Trade #3: 10 pip stoploss, 20 pip takeprofit. You win for +20 pips ($20).

Account Balance = $1019.90
Total pips = negative 70.

You made money but lost pips!! It can also go the other way around, you can gain pips and lose money. I’ve had people tell me I’m �crazy,� �wrong,� and most recently �dealing in semantics� whenever I point this out.

If you follow proper money management rules, a system that makes 100 pips per day with a 20 pip risk is a much better system than one that makes 500 pip per day with a 500 pip risk. Yet people will flock to the 500 pips system because they think it will make them more money, when the math clearly shows otherwise.

I know it will never happen, but wouldn’t it be better to report our, and our systems, profits in percent over time instead of pips?

Yes of course ROC (Return On Capital) is the only sensible way to measure performance.

System sellers, brokers etc know however, that saying “made 100 pips yesterday” sounds a lot better than something like “made 0.25% ROC yesterday”

Most newbies will be dazzled by the many pips and completely miss the important stuff such as Risk:Reward ratios, win rate etc.

I don’t think that anyone serious about forex counts pips. That’s for the lesser knowing.

Ya, I agree, pips by it’self is not a really good measure.

When judgeing a system/way of trading I think the following should be included:

  1. Sample size. Has this been tested over hundreds or even thousands of trades? NOT, backtesting, forward testing. IMO, backtesting is useless and a waste of time. Did you just get lucky?

  2. Win/loss ratio.

  3. What the average winner is.

  4. What the average loser is.

  5. Able to be repeated over time. Not just a few trades, but a year or more.

  6. Was it done LIVE. If you didn’t do it LIVE, don’t come talking about the great system you have!

I agree with everything you said, except that backtesting is useless.

I think backtesting can be a great tool, if used [I]correctly[/I]. A good example would be the Sunday breakout strategy I currently trade. I backtested it last late year, all the way back to 2005, and it was consistently profitable. So I then started trading it live and have made quite a bit of money with it. It only generates one or two trades per week, so if I had forward tested it on demo before trading it live it literally would have taken me years to get enough data to know if it was a good strategy or not.

How about if I trade .1 lot(mini lot) for each 1k in my account, and the risk: reward is 1:2 or better, why pip count is not good enough?

If you trade like that then the pip count is a good indicator for success. And you did a great job of explaining why it works for your trading system. If everyone did that new traders wouldn’t get confused as much.

I just think newbies get confused because a lot of traders use them when they are NOT an indicator of success.

I wrote a response on the other thread about my thoughts on this subject but for some reason it never showed up. I will write something again because I think it very important for people to understand and not get dazzled by numbers like many system sellers and forum writters know people will.

I agree with you phil and have thought for a long time that the only true judge of a system is the return of risk and amount of wins vs loss. I couldn’t care less if your system makes 10,000 pips if your risk is 20,000. I’ll stick to a system that wins 15 pips but risks only 5 any day if they both win the same amount of times.

I did write a lot more originally but I don’t really need to at this stage because I think you have covered everything and I whole heartledy agree with you.

My other pet hate on forums is when people write about entering a trade with a 50pip stop, taking half profit at 20pips and then the other half at 60pips (for example) and say they won 80pips, but, when they lose a trade with the same risk as the winning trade they tend to forget to write they lost 100pips and they write they lost 50pips. Get honest people, you either won 40pips on the winning trade or you lost 100 on the lossing trade. Make you mind up whichever way you want to calculate it, but just make sure you don’t leave out that important fact.

I feel better now.


but wouldn’t it be better to report our, and our systems, profits in percent over time instead of pips?

Totally agree.

Thats how I measure my success every day on my thread.
And it’s the only real way to tell if you’re profitable over time.

[B]In all this discussion of pips, percentage, money, success I trust you will all keep a perspective on this.[/B]

You can have lots of money but be desperately unhappy.

If you are making very good money (successful) then give 10% to a worthy cause.

As a person in the last years of my life, I say that nothing makes you more fullfilled than doing good to the poor.

:slight_smile: :slight_smile: :slight_smile: :slight_smile:

This is one of those statements that has people thinking incorrectly about things and why focusing so much on R/R isn’t a good thing. Your example fails to account for Win %. If the Win %s are right (assuming equal number of days traded) the 500/500 system would absolutely crush the 100/20 one.

If, for example, the 100/20 system had a 50% win rate it would be expected to average 40 pips per day. If the 500/500 system had a 60% win rate it would average 100 pips per day.

Any system that claims “x pips per [B]day[/B]” [I]should [/I] already have win percentage factored in to that number. If it’s pips per trade I can see your point, but a 100 pip per day system should generate an average of 100 pips per day, not 40.

Anyone who claims 100 pips per day, or any other number, should be getting that number by totaling all the winner and losers for the whole day. So that is accounting for win percentage, isn’t it?

Point taken, but to that end you still have questions regarding 100/20 being better than 500/500 because by this definition the latter produces much more profit per day. It then becomes a question of whether the 100/20 system could be scaled up sufficiently to acheive the same 500 raw return. That’s more than just saying you’d trade 5x as large (if you can), thus making use of the higher R/R ratio. It has to also take into account things like drawdowns.

My point exactly!! The 500 pip per day system does NOT [I]necessarily [/I]produce more profits per day! Depending on your money management system either could produce better results.

If you trade a set lot size then the 500 pip system could be better, but if you trade a set percentage of your account per trade then the 100 pips is probably better. This is a perfect example of my original point… That pips alone are not a good indicator of profit.

So far I’ve been measuring my success with the amount $$$, average win/loss, and lot size/pips.

If I was to measure in only pips so far today I’m +147 with for today, which really wouldn’t mean anything to me. When I take lot size into consideration (394k for today) it really does set things off differently in terms of success for me.

The problem with thinking about things in $$$ terms is that at a certain point it can mess with your head and thereby your trading.

“Can I really risk that much on this trade?”

When you start getting into bigger trades this one can cause heart palpitations, even if you’re taking a reasonable % risk.

“I could make $XXXX if this trade works out.”

This one, of course, leads to taking too much risk.

It tends to be much better to think in % terms rather than $$.

I couldn’t agree more!!

I have nothing on my screen that shows dollar amounts while I’m trading. If I see my trade is down -25 pips I could care less, but if I saw it was down -$500 I would freak out!!

While a trade is open [I]everything [/I]is measured in pips on my screen!

I know its risky, but for now I’m just playing with this whole thing. I’ve been going into lot sizes of 50 on my micro account and so far have been doing well. I know it’s risky right now but I figure might as well make the crash and burns earlier on and learn from it then later on.

Funny thing is phil, I’ve actually been around -40 pips and it showed a good size $$$ loss with one of my 50 lots, but I wasn’t too worried about it. I knew it would come back up and it did. It’s gonna catch up to me one day but for now…just testing the waters :slight_smile:

If it doesn’t bother you then go for it. Just be mindful of the dangers…

Will you still be able to shrug in off years from now when your down thousands, or [I]tens [/I]of thousands of dollars?? :smiley:

Only one way to find out :smiley: