STOP THINKING ABOUT LOSSES IN PIPS

                           Whenever I do a presentation about trading long-term charts, I’m always
asked how many pips I risk on each trade. Many traders assume that trading
a daily or weekly chart requires risking a tremendous number of pips
on each trade, and they can’t afford that risk. This is a logical assumption
because many traders are conditioned by lessons on day trading to risk
a small number of pips when trading a smaller timeframe. The notion is

also suggested by books and articles. I read one book that actually suggested
that in order to “swing trade,” you need to risk between 100 and
250 pips per trade. These assumptions are completely absurd because managing
risk correctly has nothing to do with how many pips you risk. Managing
risk is about managing the size of each position relative to your account.
How many lots you trade and what kind of leverage you use will determine
how many pips you can risk on a single trade.
Of course, the number of pips actually risked on any trade will be determined
by the placement of a stop loss, but the overall risk to the account
will depend on the position size. By adjusting the position size, a trader can
increase or decrease the number of pips available for a trade to risk, as illustrated
in Table 4.2. The example in Table 4.2 illustrates how a trader
can risk $1,000 three different ways by adjusting her position size. Notice
how the number of pips available changes with the change in position size.

The example assumes a trade on the EUR/USD using 100:1 leverage. You
might be able to risk over 100 pips and still only risk a small percentage of
your account using the proper position size. You should always determine
the proper place to put your stop loss and then work a position into the
number of pips being risked. Never arbitrarily place a stop loss based on
position size. The stop should be correct for the trade at all times. If you
can’t afford the stop, don’t take the trade. For the record, you can trade
using a daily chart and risk as little as 30 pips. You’ll learn how to do that
in Chapters 6 through 9. The key lesson of this section is to stop limiting
yourself by thinking about losses only in terms of pips and use the lessons
in the next section to size positions properly.