Your 1 Pip Fortune

Boris Schlossberg

There are only a few things that I fairly confident about and the idea that the next 20 years will be terrible for long term investors is one of them. Over the past three decades investors have enjoyed unparalleled good luck as declining bond rates, rapidly improving technology and a massive fresh, new pool of savings from one billion Chinese consumers made investing in equities a very lucrative proposition.

Stocks have compounded by almost 8% annually for the past 30 years and all you had to do was drop money every single year into an index fund and you were guaranteed to be rich (or at least much wealthier than when you started). We are now living in the golden age of the index investing with more than 3 Trillion dollars allocated to that instrument. But I have news for you, whenever 3 Trillion dollars is allocated to anything in the financial markets it’s almost certainly a sucker bet, because contrary to the Wall Street propaganda markets are much more like a zero sum game than you think. Here is paper from McKinsey that provides the intellectual foundation for my skepticism about the future of investing but you don’t even have to read it. Just look at the table below that shows 70 plus years during the last century when equities produced “bupkas” as we say in New York.

screenshot-2016-12-02-14-32-05

So don’t bet on buy and hold, because it most likely will not work.

Which bring me to active trading. Now I am first to admit that I am talking my book here. I love daytrading and would probably do it even if I could make more money as an investor. Guilty as charged. I believe that day trading is a superior way to make money not only because it is far less volatile, but also because it is an absolute return game and does not depend on the upward drift of the market in order to make you money.

But it is, by no means easy.

I remember a few years ago I horrified a member of my chat room when I told him that the only way to make 100 pips by day trading is to do 100 trades. He was aghast that it would take so much work to achieve such a paltry profit.

The other day, I suddenly remembered that conversation during our daily webinar and decided to look at my personal trading account which I have banged around for more than 1600 trades over the past year. True enough the average NET profit was 1.1 pips. Feel free to check it out here (just make sure to run the data up to November 7th, because my massive winning trade in USD/MXN wildly skews the average to the upside from the election onward).

When you think about it, my day trading results are not at all surprising when you put them into the contest of the real world. After all, consider toothpaste, gasoline, even running a restaurant. When the business person accounts for all the costs of the business what drops to the bottom line is just 3 cents on every dollar of revenue.

When you start thinking about day trading as a business rather than as lottery based amusement that’s when you get a much more accurate idea of not only how to succeed, but what to expect.

And that’s another reason to be grateful for day trading. When done right it provides us with a much more accurate view of the financial world.

How Big is Your Pip Donald Trump?

Boris Schlossberg

How big is your pip? The answer to that question will determine many things including whether you can survive the markets for more than a week to how much you can realistically expect to make on your capital.

Now if you were Donald Trump -- you would no doubt say that your pip is HUUUUGE. But then Donald Trump went bankrupt four times and any equity investment in his companies lost 90% of its value so I really don’t want to trade like Donald Trump because I don’t get to play with other people’s money.

I risk my own capital so my pip is tiny. For every 10,000 of capital my opening trade is 2,000 units. That means my pip is worth just 20 cents. A typical profit on my day trading account of 10 pips earns me just 2 basis points. That’s right you don’t misread me. I make 2/100th of 1% on any given 1st trade I make. On the second level trade I earn a whopping 8.5 basis points. Of course when I lose I only lose 30 basis points of just 1/3 of 1%.

Why is my pip so small? Because I day trade and I make money from volume not size. When you are doing a lot of volume (trades) you need to make sure that any one loss is very small. On a typical day I try to do 10-15 trades and make 10-20 basis points. That may not sound like much but at 250 trading days a year it can add up to 50% on your money. More importantly it produces equity curves like this.

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My gains may be small but my drawdowns are very controlled. If I do earn anywhere between 25-50% this year, my drawdown should not be any worse than -15%. Now you may think I am a wuss. You may want to try to double your account in which case you’ll have to trade 3 times as large as me or make your pip worth 60 cents per every 10,000 of capital. But beware -- you may indeed be able to make 50 basis points a day that way -- achieving 100% annual gains but at the risk of drawing down -50% or more of your equity. More reward always means that there is more risk involved and the key question you need to ask yourself is whether you’ll continue to trade if you lost half your money.

BK Big Trades (52/63 winners) + Day Trades + 24 Hour Trading Room

When the money is not yours the answer is easy, but when it is I am not so sure most of us could take such pressure. As someone in my room remarked today “I’d rather be trading small forever than trade big for a week.”

Why a PIP is the Key To Trading

Boris Schlossberg

There are about twenty odd definitions for the word “PIP” in Urban Dictionary. Some would make a sailor blush. But for us forex traders pip only means one thing -- it’s the smallest unit of change in the market. It’s what we chase all day. It’s how we measure our success. In short -- for those of us who day trade the currency market a pip is what we live for.

But what if we are doing it all wrong? What if the word itself holds the clue to a much better way of doing business?

A pip in FX stands for “percentage in point” and it’s that word percentage that we should never forget.

Almost every trader I know, yours truly included, makes the mistake of evaluating himself on pips made or dollars earned. On the surface that makes sense but in reality this is not only stupid but can be very harmful to your long term financial health.

Looking at pips made is probably the dumbest way to evaluating your success. Four out of five days I actually lose more pips than I make, but thanks to the marvel of the VT system my net P/L is usually positive. This week, one of the best traders in my room shared his myfxbook results in our room and he too showed a lot of bleeding on the pip front, but his actual account was up 5% since the start of this month!

Pips in and of themselves do not matter. What really matters when you trade is how much size you use on your winning pips versus the size on your losing pips.

A second common way of looking at your account is even worse. Don’t ever brag to me about how much money you made. That is almost a guarantee that you will lose it all. I understand that ultimately the purpose of trading is to make money -- but the irony of this business is that if you focus on money -- you will never make any. That’s because when you encounter an unexpected loss ( and let’s be honest -- they are all unexpected) you’ll start to think about how much money is being drained to the market and you will hesitate just long enough -- an hour, a day, a week -- to totally blow up your account.

A much better, more professional way of looking at your account is to measure your wins and losses strictly on a percentage basis. Looking at the value of your account that way does two things -- it abstracts the actual money involved so that it really doesn’t matter whether you trade 1000 or 1 Million units and it keeps you focused on what’s important which is managing your P/L so that day in and day out you add 20, 30, 50 basis points to your equity. Most importantly it allows you to plan for maximum loss in percentage terms and also provides you with the ability to plan on how to recover those losses. For example in my trading plan my max loss on any trade cycle is 125 basis points which I know from prior experience I can recapture with 1-3 days of proper trading.

Join to our Trading Room and See How We Trade for 100+ points per Day

The key thing about this approach is that you are never in a situation where you face risk of ruin by letting one trade take 50% of your account. If you think in percentage terms, every trade is just a basis point win or loss. It’s never personal, is just business which exactly how it should be if you want to succeed in trading.

NZD/USD – 100 pip Reaction to Dairy Auction?

NZD/USD – 100 pip Reaction to Dairy Auction?

Chart Of The Day

Fundamentals

Tonight’s Dairy Auction in New Zealand could have a significant impact on NZD/USD. Over the past 2 months, dairy prices have fallen 20% and since milk represents 30% of New Zealand’s exports, the decline in prices is expected to restrict the country’s terms of trade and possibly even slow the central bank’s pace of tightening. The last time the auction took place on April 15th, NZD/USD reacted very negatively to lower prices and lower volume. Over a 72 hour period, the currency pair dropped from a high of 0.8690 to a low of 0.8560. A very similar reaction was seen after the April 1 auction, with NZD/USD dropping from 0.8670 to a low of 0.8515 on the back of lower prices. If tonight’s auction yields similarly disappointing results, it could reverse the rise in the New Zealand dollar and drive the currency pair below 86 cents. On Wednesday RBNZ Governor Wheeler will be speaking about “The Significance of Dairy to the NZ Economy” and there is a very good chance that he will use this forum to signal a slowdown in tightening. If we are right, there could be a nasty correction in NZD/USD. Of course if the results of the milk auction is strong, a relief rally in the currency could take it to new year to date highs.

Technicals

The NZD/USD chart highlights the currency pair’s move after recent dairy auctions. On a technical basis, higher lows and higher highs signal strength for the currency but 87 and 8750 are significant resistance levels for NZD/USD. If both levels are broken it should be clear sailing up to 8845 but if NZD/USD fails below 87 cents, a drop to 86 becomes likely.

The Shortest Pip

Boris Schlossberg

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At around 7 AM NY time this past Wednesday things were looking mighty bleak at BK. The week prior I had shorted AUD/NZD -- which produced a picture perfect setup for type of trades we do -- only to watch it come within 3 pips of my target and then retrace all the way back to stop us out and THEN proceed to once again turn to the downside.

I was beating myself up over the pricing of the entry in the trade, playing the ever popular and the ever useless second guessing game of “if my aunt had b-lls she’d be my uncle.” And now with that sour memory still in my mind I was staring at USD/CAD which had broken out through the key 1.1000 level just the day before and in typical USD/CAD fashion refused to move higher, catching all the breakout traders like myself leaning the wrong way. The pair had floundered throughout the night and was moving dangerously close to my stop.

55, 54, 53. “F -just stop me out already!” I thought to myself, my mood darker than the winter New York night.
52.5, 53, 54.
It was like water torture, but the trade managed to stay alive by 1/2 of one pip.

By morning USD/CAD had moved off the lows and of course in wake of the dovish BOC announcement it raced to fresh yearly highs and we eventually made 168 pips on the trade. That was followed by 150 pips on GBP/AUD the day after that and another 150 pips on EUR/AUD the day after that. Voila, suddenly we had the best week in our history.

So what does this week in market teach us? That the difference between losing and winning can often rest on one single pip. That’s is why we should never be despondent when we lose, nor ecstatic when we win. To trade for the long term means to stick to a process irrespective of the vagaries and frustrations of the day to day flow. At BK we have been much more disciplined in our approach this year and that hopefully is far more important than the weekly pip tally which is much further away from your control than you think.