What is the PPI indicator for?
If everything is more or less clear about the definition and formula for calculating the leverage used, then most people do not know how to use this tool correctly. In this article, we will try to help novice investors correctly apply the analysis of this indicator when selecting PAMM accounts for their portfolio.
To begin with, let’s recall the definition of the leverage used. The PPI is the ratio of the nominal volume of open orders to the amount of funds on the account. That is, if you have a warrant in EUR/USD with 1 lot, at the rate of, say, 1.0800, and funds 6 000 USD, then IKP = 108000 / 6000 = 18. A lot or a little? It is impossible to answer this question unambiguously, since the value of the PPI itself does not mean anything. For example, for short “stops” of several dozen points, higher values of the leverage used are acceptable than for Stop Loss levels of several hundred points. In other words, if one account has 10 PPI and another has 30, this does not mean that an account with a large PPI has 3 times higher risks than the other. Therefore, the dynamics of the PPI in relation to the dynamics of profitability of the analyzed PAMM account is of interest first of all.
Studying the PPI chart provides a lot of important information about the style of work of the PAMM account Manager. For example, you can see how many orders the Manager opens when they are opened and closed. But, first of all, the analysis of the dynamics of the PPI serves to assess how quickly the account can be merged, that is, to assess the risk measure when investing in a particular PAMM account. And when can the account be quickly drained? When trading without Stop Loss in General and the “martingale” system in particular is used. In General, “martingale” is a strategy that provides for a multiple (usually double) increase in the volume of the opened order when the previous order reaches a certain level of loss.
Of course, trading without limiting losses has the right to live, but the investor should be clearly aware that such an account in the event of a strong price movement can be reset at one moment. Therefore, if you want to be an investor who expects a long-term profit, and not a casino player, you need to learn to recognize PAMM accounts that use trading without limiting losses.
So, how do I determine an account that trades without limiting losses? This strategy is also called sitting out. This is when the price movement in the direction of an open order that is not profitable for us increases the loss. The Manager is waiting for the price to turn around sooner or later and go in the right direction. The problem is that it can unfold even when the account is liquidated, because the Deposit amount was not enough. Or the value of the currency pair’s exchange rate may go so far that it can be expected to return to the break-even point for years. On the PPI chart, this method of trading is displayed as follows: simultaneously with the increase in profitability, the amount of leverage used increases. If the profitability of the account decreases for a long time, and the PPI increases, this is a clear sign of trading without limiting losses. If the PPI value is reset or reduced periodically with a decrease in profitability, this means that the Manager applies loss limitation, and investments in this PAMM account carry much less risk.
The martingale strategy can be calculated using the leverage chart as follows. The PPI jumped from zero to a certain value, which means that the deal has opened. Then you can see that after some time, usually immediately after a sharp decline in profitability, the value of the PPI suddenly increased. Usually another 2 times. Then for the third time there is a sharp increase in the PPI. Then the PPI is reset simultaneously with a sharp increase in profitability. Moreover, the yield, as a rule, becomes higher than it was before the opening of the transaction. You can be sure that this is a martingale. And sooner or later, this account will be immediately merged. A small clarification: it is best to analyze the PPI schedule in hourly intervals.
Thus, we can draw the following conclusion. A smooth PPI chart, when its daily value is either zero, or fluctuates around a single value, and then resets to zero, indicates that it is much safer to invest in such an account than in one that is characterized by sharp jumps in the PPI value associated with drawdowns on the yield chart.
Of course, it is fundamentally wrong to make a verdict on the inclusion of a PAMM account in the investor’s portfolio only on the basis of an analysis of the leverage used, since high leverage does not mean high risks in itself. You need to use several analysis tools that Alpari provides in abundance for analyzing PAMM accounts.