Rafael told me a story about how a woman he knew who was able to double her trading account once every two or three months. Truly a rare talent. This got him excited and he raised some money from investors to back her.
You would think that more money would mean more profits, infinite wealth and “happily ever after”, right?
Wrong.
At first, she almost lost the entire account. Then she got herself together and finally made it all back, finishing with a small profit. But the volatility was too high and the investors withdrew their money. But how is this possible?
If you can double a $10,000 account, doesn't that mean that you can double a $10,000,000 account?
Not necessarily. The reason is usually because you are thinking about the dollar amount, relative to your financial situation.
Here is what I mean…
The Theory Of Dollartivity
Trading a much larger account can really start to mess with your head, if you concentrate too much on dollar values. In the case of the woman Rafael was talking about, she was used to trading a $10,000 account and could comfortably grow that account on a consistent basis.
However, when she was given much more money to trade, the dollar values started messing with her head. First of all, she saw this as a huge opportunity because nobody else had every given her a chance like this before. This made her nervous and led to second guessing and not trading like she did before.
Second, and this is only speculation on my part, but the dollar values that she was dealing with were probably way out of her comfort zone, relative to here current situation.
I call this the Theory of Dollartivity.
For example, let's say that you are making $60,000 per year at a job and you have a $10,000 trading account. Then all of a sudden, you get some investors and start trading a $5,000,000 trading account.
Risking 1% of your $10K account per trade means that you are risking $100 per trade. If you are used to making $60K per year, then this is not a huge risk. But if you start risking 1% of a $5MM account, that is now $50K of risk per trade…almost the same amount that you make in an entire year at your 9-to-5!
See how that can really mess with your head? The money management is exactly the same, but dollar value, relative to your financial situation, comes into play. If you are in a trade and down $25K, you might start to freak out, when in reality, it is no different than being down $50 in your $10K account.
So how can we overcome this? I'm sure that there are different ways to do it, but here is the easiest way that I have found…
Why I Switched To Watching Pips
I have been thinking about this a lot lately and realized that there are times when I close out a trade because the dollar value scares me a little. This goes both ways, sometimes I'm afraid to lose my current gains and sometimes I think a loss is too big and close the trade too early. Then of course, the trade turns around and goes wildly in my favor.
You know what I'm talking about.
Therefore, I have started watching pips instead of dollar amounts. I changed the Oanda app on my phone to only display pips and I will do the same for my Java client. This is what my iPhone app looks like now:
By only watching pips and current price action on the charts, this has really helped me see the markets more objectively and make decisions based on what the market is telling me and not because I have an emotional attachment to the dollar value on my P and L. I feel that making this change will help me scale to trade any sized account because the experience will be very similar…
…just watching pips.
Do you watch dollar value or pips when you trade? I would be interested to find out, leave a comment below and let me know.
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Photo Credits: Upside Down | Money Heads
Hi Hugh
Do you know if I can change to pips only on the MT4 IPhone app?
Hi Andrew,
It’s not possible on the current version. Would be great though, huh?
Nice article and nice advice. I watch pips on my MT4 platform.
Cool, thanks!
Hi Hugh,
I watch pips too…it helps me smooth out the powerful emotional money triggers we all have that are triggered at both the thought of making money and the thought of losing money. It doesn’t matter which one happens…we all experience the exhilaration of winning and the pain of losing money.
Given the current forex market conditions of the last several months, in our group of price action traders, we are going for bites…20-25 pips in profit while only risking 8-12 pips max on any pair. We don’t look at the dollars or euros…we look at our pips…win or lose.
Thanks,
Thanks for the input Kim!
Hi Hugh,
I came across trading heroes on youtube and followed the link on your fifty pips interview (the Second One) I appreciate the time you take to provide us with good information. I have traded equities and futures for a while but I am now looking for some FX exposure.
I’ll be reading and listening to a lot of your info. I also like how blog isn’t littered with ads.
Shawn
Hi Shawn,
Glad you liked it, good luck!
Hugh
I had the same issue. I remember doing really well for about six months last year (I’m an options trader) and I was getting pretty confident. I increased my position sizing anticipating the momentum continuing, but instead, my profits started dwindling. Over the next two months, I lost most of what I had made over the six months so I shut down my trading and took a closer look to see what happened (it wasn’t clear to me yet). Wouldn’t ya know it, it was exactly at the point where I increased my sizing that my accuracy went down. My mind was just not ready for the bigger sizing values. They made me nervous and that is not good for a trader.
I don’t think I can concentrate just on points or dollars because of the more complicated pricing of options, but I AM working on focusing strongly on the PERCENTAGE of account value size rather than the dollar amount of the position.
Hi Daniel,
Glad to hear that you are focusing on percentages and that is working for you. Thanks for sharing!
Hugh
I never thought switching P & L value to pips can make a better emotion. I will try this 🙂
Cool, let me know how it goes.
another way to do it is not to deposit 5Million USD all into the broker.
I would split it into 2 part
1. 500K USD deposited to broker using high leverage
2. 4.5 Million USD deposit to High Yield Bonds or other low risk investment
Cheers
True, that is a good point.
I watch pips , I only started doing this a couple of months ago and yes I know it’s made a difference, I can now not mess with my trades and stick to the plan. On MT4 right click on any trade or balance line and change profit display as points and then adjust the terminal window so you can only see the open trades and not the overall profit/loss . It’s easy for me as I trade a 5min and only have one open position at a time. I evaluate after the fact through account history.
Thanks for the input Damien. Glad to hear that you are getting off to a good start. Great tip on MT4!
Hey Hugh!! Great article. I used to watch the dollar amount, but later switched to watching pips. It has been much better ever since. Still not where I want to be yet, but getting there a little easier now.
Cheers!!
Hi Keith, thanks for the input, good to know that is working for others too!