A while back I had a conversation with a fellow trader. He asked me how many pips I gained off my last trade. I told him, “400 pips”.

He inquired on the trade before that.  “550 pips”, I answered.

His jaw dropped. “You made nearly 1000 pips in two trades,” he said in shocking disbelief, “You must be loaded!”

I turned around and asked him the same question, “30 pips on the first trade, 15 pips on the second trade.”

That was the difference between us. Based on where he was trading, 400 pips would seem like a lot. In his mind, I must have been some sort of master trading making oodles of money. At one point he even did express on my account size, and commented that one day he’ll trade that many pips when he was a large enough capital. Truth is, that even someone with a 100 dollar trading account could have still achieved the pip size I had. 

This trader was most likely making a decision to base all his trades with the same pip size. Say for instance, this trader decided to trade 10 dollars per pip. You can see how his eyes widened when he discovered I was taking down 10 times more pips than he was.

When talking with this trader, it was discovered that he bases his lot size off of his bankroll. For every 1000 dollars he had in his account his lot size was .1 and he never exceeded a 20-pip stop loss. Now there’s nothing wrong with this particular management system as long as he is trading the exact same thing every time.

However, you and I both know, the market is not that consistent.  A similar trading set up can yield a vast variety of results. So when this trader is in the market, he is putting himself at an unnecessary risk as he is setting a hard line rule for an ever-evolving market. A wise trader does not look at pips alone to determine lot size. But rather it adapts to the stop loss that is necessary based on what the market is doing.

My lot size will always vary. I first look at the market to determine where a sensible stop loss should be if I am in the market. From there I calculate how many pips. With this knowledge I then look at the size of my bankroll and ensure that the trade I am entering will have a lot size that will not exceed 2 percent of my bankroll.

When you are thinking in terms of percentages, not pips, you are giving yourself a broader view of the market. You are able to adapt to current market conditions. And you will ultimately become a better trader than one that limits the way he concocts lot size.

No matter what your trading system is, you should never risk more than 2 percent in any trade.

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