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  #21 (permalink)
 mrphr 
London
 
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Fat Tails View Post
Either you cannot or you do not want to understand. A pip depends on the base currency of the pair. The base currency is the second currency.

For EURJPY the base currency is JPY, for USDCHF the base currency is CHF. JPY pips are different from CHF pips.


You would not compare the price of a hamburger in USD, CHF, EUR and JPY and then conclude it is cheaper in Euro, because that is the highest valued currency.


You can only compare pip ranges of currency pairs that use the same base currency.


Otherwise you need to convert all pips to the same base currency before comparing them.

As you would do with the hamburger.

Okay, let's forget about hamburgers, pairs and base currency and let's put it this way:

You have instrument X and Y:

Instrument X your profit potencial is $1000 when you have a signal.
Instrument Y your profit potencial is $800 when you have a signal.

On both instrument you have the same spread, the same commissions and the same amount of initial risk.
[In reality it will be a bit different]

You have now a buy signal on X and also a buy signal on Y, if you could chose ONLY X or Y to take a long position, which one are you going long?

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  #22 (permalink)
 
ThatManFromTexas's Avatar
 ThatManFromTexas 
Houston,Tx
 
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mrphr View Post
Okay, let's forget about hamburgers, pairs and base currency and let's put it this way:

You have instrument X and Y:

Instrument X your profit potencial is $1000 when you have a signal.
Instrument Y your profit potencial is $800 when you have a signal.

On both instrument you have the same spread, the same commissions and the same amount of initial risk.
[In reality it will be a bit different]

You have now a buy signal on X and also a buy signal on Y, if you could chose ONLY X or Y to take a long position, which one are you going long?

@mrphr
How do they have the same risk is they have different profit potential?

I'm just a simple man trading a simple plan.

My daddy always said, "Every day above ground is a good day!"
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  #23 (permalink)
 mrphr 
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ThatManFromTexas View Post
@mrphr
How do they have the same risk is they have different profit potential?

@ThatManFromTexas

That is why I said in reality it will be a bit different, because you could risk $250 on the instrument X and $200 on instrument Y, so risk factor of 1:4 for each instrument. But when you are going to place stops you need to place a technical stop and not a money stop, even tho I do like the idea of money stop I will place my stops based on swing high/lows.

So to simplify things I said same risk but in the reality it will be a bit different; The same for the spread, how come two different instruments have the same spread, they will probably not have the same spread. X could have a much lower spread than Y... I was just trying to simplify things.

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  #24 (permalink)
 
Fat Tails's Avatar
 Fat Tails 
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mrphr View Post
Okay, let's forget about hamburgers, pairs and base currency and let's put it this way:

You have instrument X and Y:

Instrument X your profit potential is $1000 when you have a signal.
Instrument Y your profit potential is $800 when you have a signal.

Exactly, but you did not compare the profit potential, you compared pips!

Instrument X = EURUSD -> profit potential = 108 pips = $ 1,080
Instrument Y = USDJPY -> profit potential = 80 pips = Yen 80,000 = $1,029

Your statement: "USDJPY only gets me 60 pips, EURUSD 124 pips" does not compare profit potential. You are comparing apples and oranges.


mrphr View Post
On both instrument you have the same spread, the same commissions and the same amount initial risk.

What is the spread?

1 lot EURUSD = 100,000 Euros x 0.5 pips = $ 5.00
1 lot USDJPY = 100,000 USD x 0.5 pips = Yen 500 = $ 6.25

What is the commission (0.4 basis points x trade value per roundtrip)?

1 lot EURUSD = 100,000 EUR * 0.00004 = € 4.00 = $ 5.26
1 lot USDJPY = 100,000 USD * 0.00004 = $ 4.00

What is the risk?

1 lot EURUSD = 100,000 EUR = 131,500 $
1 lot USDJPY = 100,000 $

Neither spread, nor commissions nor the risk are similar.

Spread and commissions cancel out for this example - albeit just by chance.

The risk adjusted return for USDJPY is even higher than for EURUSD.

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Last Updated on May 2, 2012


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