If traders don’t know how to accurately calculate trading profits and losses, then we will have no idea where we will stand and if what we are doing is actually working. We also have no idea if what others is doing is actually working.
Profits and losses can very often be deceptive and in this article we will go through the most understandable and accurate way to calculate profit and loss and how to stay away from being deceived.
Traders need to think in terms of money and not pips is fundamental for knowing where precisely we are as a trader. Pips can be a solid helper, however they can also be quite misleading and don’t provide us the full picture.
As traders we need to understand if we are making profits and cold hard cash. We also need to be aware of that when we put on our subsequent trade it will not be so large that it may blow our whole account, or so small that it will not cover any losses.
Use Pips to Calculate Profit and Loss?
Traders will regularly calculate their profits with what are regarded as “PIP”.
The large problem with pips is that they can regularly be deceiving and not provide you the true picture of whether or not you are making money or not.
As a trader, you should know that pips do not truely determine if you are profitable or not. You cannot eat pips and you can’t purchase anything with pips.
You can purchase things with money. At the end of the day, week and month you need to know whether or not you are winning or losing in cold hard cash because that is what you have deposited into your trading account and is that is what you will be withdrawing.
Positive in Pips, but Losing in Money
Ever wondered why so many signal sellers and sales people who are selling their systems, exhibit their profits in ‘pips’ and not actual dollars?
Pips do not exhibit that you are making any real profit. You can be positive many pips, however losing a lot of real dollars.
On the flip side, a trader can nevertheless make a profit, even if their pips count is negative – and that is the key. For this reason, traders should stop figuring out profit and loss in pips and instead in money.
The first step to doing this is to work out your trade position size before each and every trade.
Position Sizing Every Trade is So Important
If a trader enters the same trade size regardless of stop-loss or pair/market, then they could be risking either far more or far less than they prefer to on each trade in actual money terms.
Having the identical trade size amount on every trade does not imply you are risking the identical amount of money on every trade. This a frequent mistake made by amateur traders.
Stop size can significantly change on each trade. If you have a 20 pip quit on a 1 hour chart and a 200 pip stop on the weekly chart, then the loss of the trade on the weekly trade is 10 times the size of the loss of a 1 hour chart (if trading the same Forex pair).
The Forex pair and market can also change the amount at risk by means of an great amount. That is the reason why you should think about dollars and not in pips.
Trade sizing is a very essential factor of every trader’s plan and risk management. If trade sizing gets out of hand and gets too large, then all market analysis would be deemed worthless. For that reason, you ought to always discipline yourself to risk the identical percentage of your trading account on every and each and every trade.
Then, the solely element that will change each trade is your stop size.
Determining how huge the trade amount you need to put on depends on how big or small your stop size is and the market traded. No count how big the stop loss is in pips, you will nonetheless be risking the same percentage of your account each and every trade.
This will commonly mean different amounts will be entered into each trade.