Ed Mamula.com

Retail FX traders have an odd habit of reporting how many PIPS they have gained or lost.  A pip is a “Price Interest Point”.  It is the smallest possible fluctuation in any trading instrument.  So if GBP/USD is bid at 1.9280 and offered at 1.9284, we say that the spread between the bid and the ask is 4 pips.  In this case, a pip is 1/100th of a cent.

Seeing as how the FX market offers all traders fantastic opportunity to get creative with their position sizing via a smart use of leverage, I have a hard time understanding why anyone would quote their profit and loss in terms of pips.  If I invest in a stock, it would be common for me to tell you that I made 10%, not that stock XYZ went up by 326 cents.  To quote profit and loss in terms of pips is to completely ignore the least sexy, but of course, most important part of any successful trading strategy, and that is the position sizing algorithm.  It may be convenient to quote an individual trade’s profit or loss in terms of pips, but over a series of trades, the percentage return will tell the only story that is relevant for the trader;  the MARKET may have moved a certain number of pips, but my ACCOUNT‘s return depends heavily on how I vary my position size relative to my account size, market volatility, etc.  While it IS fun to speak in pips to describe price action, it’s more fun to talk about how that price action affected the account.

Part 2 is here

The title of this post is the funniest thing I’ve heard all day in response to the relatively large worldwide drop in stock prices that we saw today.  I was home for lunch today and I saw that the Dow Industrials were off by just over 200 points and that program trading curbs were in effect.  It’s been a while since I’ve seen that.  I thought about my stock portfolio at that moment, and decided that this was the perfect excuse to sell the stock funds in my taxable account and roll them into my FX trading capital.  I have enough invested in stocks via retirement plans as it is.  So for once, I actually did some profit taking in the stock market…my long term record in that arena is NOT stellar.

 There were no other actions to take that would be reasonable, given that my retirement investment horizon is 30+ years and I’m comfortable with my asset allocation. 

 But enough about me…

 You know, on days like today, when the market is down sharply, we always hear stories about computer glitches and other hocus pocus that was the ‘reason’ for a sudden break in prices.  Even more often, we’ll hear analysts parroting that nothing has fundamentally changed.  It’s BS.  Look, when the market breaks lower, the vast majority of investors feels pain and we are undeniably poorer…and fear never rides a tortoise out of town.  This may be a buying opportunity and it may be the start of a global double digit decline in prices…that part really isn’t important to me.  The thing that bothers me is that these “fundamental” cases are brought out on a day like today, and such stories imply that *yesterday’s* prices were the rational ones, not today’s lower prices…uh huh.  Could it be that the market was not rational yesterday and it isn’t rational today either? 

 Before making any changes to your portfolio, consider your alternatives.  For me, selling some stock today in my taxable account was a no brainer because I have an attractive alternative in my FX system.  Doing nothing in the 401K was also a no brainer, since I’m trying to build retirement wealth over the next few decades…in that context, checking the account even more than once per quarter is counterproductive, because it can only lead to fear-based emotional decision making that could be hazardous to my long term financial health.