Yes, I am a Forex Signal Provider. Yes, I report my results in pips. Yes, I do this because it’s what you want to see. However, I’d like to propose something—something many of you might find a bit preposterous at first glance. I propose you, as a potential client searching for an honest, profitable Forex signal provider, should start demanding these services report performance in equity. Why, you ask? Because a signal provider’s pip-count means jack squat to the equity growth of your own Forex account.
A pip is a pip is a pip. Sorry, but this is just flat-out untrue. Many of you use a standard rate of $1 per pip or $10 per pip. It’s what we’ve all been taught to do by our brokerages. This is utter BS and I’m going to show you why it is such a detriment to the growth of your Forex account—and to your mental state when it comes to trading.
When you vary the dollar amount of each trade’s pips based on the base equity in your account and the size of the trade’s stop loss, you will find that unbelievably, positive pip-counts can actually mean an equity loss in your account while other times, a negative pip-count can mean a growth in your account!
Now, I know you’re sitting there thinking, “This chic’s off her rocker. She’s insane. There’s no way I’d ever sign with her.” I’m not. I’m actually quite sane. And, you will. So let’s delve into it.
Let’s say, for ease of understanding, you’ve got a $2000 Forex account. We’re going to look at three completely different signals here that you could easily receive from the same Forex signal provider. The first alert has a 300-pip stop loss. The second has a 100-pip stop and the third, a 15-pip stop loss. Now it’s math time.
We’ve all been taught to risk 2% of our base equity per trade. This is a fine start but I’m going to show you why this is just the beginning when it comes to money management in Forex trading. I learned from the Forex money management Master and I’m going to share that with you.
Anyway, we’re risking 2% of our equity on this 300-pip stop loss trade. 2% of $2000 is $40. Can we all agree on that? That means you are willing to risk $40. The stop loss is 300 pips, so $40 divided by 300 pips is $0.13. Since we always, always, always round down, that means each pip is a dime or $0.10. And, yes, you’ll need a broker that allows micro lots for proper and profitable money management.
The first trade stops out. You’re now down 300 pips or $30.
The next trade carries a 100-pip stop loss and you once again risk 2% of your base equity. Since you lost $30 on that last trade, your new equity is $1970. That means you’re willing to risk $39.40 on this trade. Figuring the dollar amount per pip, we find that $39.40 divided by 100 pips is $0.394 or $0.30 since we once again, always, always, always round down.
This trade also stops out. You’re now down 400 whopping pips or $30 plus another $30 for both of your trades. You’re down 60 bucks.
This last trade has a stop loss of 15 pips. Whew, it’s nice to not have to worry about such a huge stop loss—or is it? We’ll talk more about this later. Ah, but I digress. This trade has a 15-pip stop loss with a small 48-pip target. Seemingly minor. Seemingly almost not even worth it to take. Luckily, you do.
It’s a good thing because this trade reaches the target and you gain 48 pips. Now let’s do some calculations.
Your base equity after those two losses above is $1940. But, since you lost two trades in a row, it seems the system you’re using, or the system your Forex signal provider is using, might not be cooperating properly with the current market so you want to lower your risk by 0.5%. This trade is now worth only 1.5% of your base equity or $1940. That’s $29.10. $29.10 divided by the 15-pip stop loss is $1.94. Rounding down always, each pip is now worth $1.90. Remember, you won this one.
So now, at only 1.5% risk, you just won a measly, tiny, seemingly worthless 48-pip trade. You made $91.20 on this dopey trade. Let’s take a gander at your account now!
You’re down an outrageous 352 pips. Oh my god, do you want to scream or what? 352 pips is a lot, no? But wait, your Forex account equity is now $2031.20! You started with $2000. How can that possibly be?
It’s the power of the pip, my friend, and just the beginning of proper money management. This works the same with huge pip gains. You can be up in pips and down a truckload in equity. So you see, pip is just a word. It should mean something unique to each trader for every single trade taken instead of this outrageous show of might by some signal services who never share equity. Think about it. Look into it. And always do the math. Forex signal providers who only report performance in pips are not doing you justice and you should demand more from them before you even think about signing. Pips without corresponding equity means jack squat to your account.