There is a lot of talk in the world of Forex, and has been for some time, about the 10 pips a day strategy. The lure of the strategy is the perception that making 10 pips a day can accumulate into great fortunes in a relatively short period of time. This sounds simple enough, and in theory it should be. Most of the strategies out there that aim for a small number of pips each day also carry with them a large stop loss.
At least large in comparison to the nominal profit potential from each setup. This strategy is no exception. Most of the strategies that aim for 10 pips a day use a 90 pip stop loss or greater.
I have even seen some as large as pips; to achieve just 10 pips of profit. They take on huge risk for little reward in exchange for a high win rate. Many traders like the idea of strategies like this because they produce quick wins and promise high win rates. As we all know, it feels good to win. Think about how you felt after your last winning trade. Or better yet, a series of winning trades. You put in the work to find a favorable setup which resulted in a profit. However there is something wrong when you choose a strategy simply because it induces a winning feeling more often than not.
The logical side of your brain wants a trading strategy that will grow your trading account. This involves risking a large amount of pips for a relatively small gain. Think about it this way. So for ten days of trading, you have made pips. At the end of those ten days you feel unstoppable.
Your stop loss is hit for a 90 pip loss. So after eleven days of trading, you have 10 pips of profit. The unfavorable risk to reward ratio brings us to the next reason why the 10 pips a day strategy is dangerous — unrealistic expectations. You can quote me on that. The market moves on its own schedule. Every week is unique, just as every day, hour and minute is unique. To become a consistently profitable Forex trader you have to learn to take what the market gives you.
That might mean not trading for a day or even a week. To say that a market is going to move in a way that will produce 10 pips of profit each and every day is completely unrealistic. This can be used for any trading strategy out there. In order to do this, you will need to use two metrics to track your performance. The first metric should be your percentage gain. This will be the amount you aim for each month.
This is a realistic expectation and has real value. If you simply aim for pips per month, for example, who knows how much each pip is worth. By using a percentage gain you are establishing a performance target with real value. The second metric needs to account for risk. What is that, you ask? You simple take your profit target in pips and divide it by your stop loss in pips.
For example a pip target with a pip stop loss would be 3R. Therefore the goal for your second metric would be to maintain an average 2R minimum for the month. This forces you to look for favorable trade setups where the potential reward is at least twice the risk. There you have it. At least not the root of the problem.
The other problem is risking nine times the potential reward. Becoming consistently profitable is all about putting yourself in favorable positions to make money. A trade setup where a loss is nine times greater than the potential reward is the opposite of favorable.
You may say this is all just my opinion. And you would be correct. But when was the last time you heard a professional Forex trader say they were done for the day because they hit their 10 pip goal? For the longer-term trades, especially when multiple leg option structures are involved and some capital may have to be employed, I look for a profit to loss ratio of at least five to one. Or that price action is the only viable trading strategy. Dare I say impossible?
Do you think the approach to setting performance targets discussed in this article will be helpful in your trading? Please log in again. The login page will open in a new window. After logging in you can close it and return to this page. Session expired Please log in again.More...