**FOREX is about Dollars not pips**

On one of the recent Hater posts I saw a really odd comment ‘ I saw he had a stop loss of 100 pips and that struck me as strange’ I wondered why should a stop loss of 100 pips appear strange? I have also noted from discussion with people following my trades that many have not made any money despite the trades delivering a strongly positive number of pips, I have thought hard about this and I think the problem is that people are following pips and not dollars.

When I look at the size of a stop loss it is not the number of pips that matter it is the number of dollars and I adjust my position size accordingly, I will try to explain all of this with two examples of trades from an imaginary trader who has a $1000 account (lets call him Fred).

I recently suggested a trade Long NZDUSD at 0.7287 and stop loss 0.7180 that is a stop loss of 107 pips (7287-7180). Fred has to decide how much of his account he is prepared to risk and he chooses 5% ( a common figure I personally choose 2%) this means his stop loss has to be equal to 5% of $1000 = $50, so it is a $50 top loss not a 100 pips. To work out his position size he does $50 / 107 pips = $0.47 per pip. So he chooses a position size of either 0.04 (40 cents per pip) or 0.05 (50 cents per pip) as you cannot do 47cents per pip.

When I look at the size of a stop loss it is not the number of pips that matter it is the number of dollars and I adjust my position size accordingly, I will try to explain all of this with two examples of trades from an imaginary trader who has a $1000 account (lets call him Fred).

I recently suggested a trade Long NZDUSD at 0.7287 and stop loss 0.7180 that is a stop loss of 107 pips (7287-7180). Fred has to decide how much of his account he is prepared to risk and he chooses 5% ( a common figure I personally choose 2%) this means his stop loss has to be equal to 5% of $1000 = $50, so it is a $50 top loss not a 100 pips. To work out his position size he does $50 / 107 pips = $0.47 per pip. So he chooses a position size of either 0.04 (40 cents per pip) or 0.05 (50 cents per pip) as you cannot do 47cents per pip.

## Risk Reward

If Fred is risking $50 on this trade the minimum return if successful using my methods would be $100, I would not take a trade with risk reward less than 2:1. In pips this would be a target of 214 pips.

The following table shows the effect of following this strategy for 8 trades when you have 4 wins and 4 losses, the distribution of the wins and losses makes no difference.

The following table shows the effect of following this strategy for 8 trades when you have 4 wins and 4 losses, the distribution of the wins and losses makes no difference.

The Table assumes an opening balance of $1000 and gives the balance after each trade, risking 50% of your equity on each trade can destroy your account and unless you have an incredibly high hit rate you cannot make a huge amount

## Example 2 More Technical

Lets suppose Fred wants to take a long position on the AUDNZD, this trade had an entry point at 1.0393 and a stop loss at 1.0349. That is 10393-10349 = 44 pips, he still wants to risk 5% of his $1000 account but the problem here is that these pips are NewZealand dollar pips not US dollar pips. On all crosses the second half of the pair denotes the currency of the pip and we must take account of this when working out the position size.

We do it in two stages firstly we work out the position size in US dollars

$50/44 pips = $1.14

Then we convert to NZDollars using the exchange rate of 0.73 the value of the NZDUSD at the time

1.14/0.73 =1.56

So the position size is 0.15 or 0.16.

We do it in two stages firstly we work out the position size in US dollars

$50/44 pips = $1.14

Then we convert to NZDollars using the exchange rate of 0.73 the value of the NZDUSD at the time

1.14/0.73 =1.56

So the position size is 0.15 or 0.16.

## Conclusion

The first trade had a position size of 0.04 and the second 0.15, the pip risk was 107 pips in the first and 44 in the second but the dollar risk was exactly the same at $50.

The point here is that the number of pips on the stop loss has halved between the two trades but the Dollar stop loss has remained exactly the same at $50 we have just adjusted the size of the trade to make sure that happens.

As a swing trader pip stop losses can very dramatically up to 200+ pips, but the dollar stop loss remains the same and hence the risk remains the same. As long as the risk reward is good and you have a good win rate you will make consistent gains to your account far better than you can in almost any other way.

The point here is that the number of pips on the stop loss has halved between the two trades but the Dollar stop loss has remained exactly the same at $50 we have just adjusted the size of the trade to make sure that happens.

As a swing trader pip stop losses can very dramatically up to 200+ pips, but the dollar stop loss remains the same and hence the risk remains the same. As long as the risk reward is good and you have a good win rate you will make consistent gains to your account far better than you can in almost any other way.