My Goal is to Make 20 Pips a Day

You would think something as simple as what I am about to share with you would be widely followed, but you’d be wrong. Even in my own trading this simple concept seems to be beyond comprehension at times.

To survive trading in our beloved forex market, you have to limit your losses to the point they are minor annoyances. And then you have to take more in profits than you give up in losses. Pretty simple concept isn’t it.

But why do most traders fail to comprehend this basic truth of trading? Is it all in their heads? Perhaps, but we’ll deal with the head case aspect of forex trading in another article.

Right now let's get to the premise of this article, which is simply this: make it your goal to lock in a 20 pip net gain every day you trade. I know that sounds boring. Its not as sexy as hitting those 100 pip trades. But you are trading to make money not to entertain yourself right?

If not, you are likely to go broke, and sooner than later I’d guess. So lets get into the mindset that this is a Business, and it must eventually make a profit if it is to continue operating.

For starters you should be trading on a mini lot size account, where each trade unit or lot is only 10K.

Lets go over the math real quick. First lets discuss leverage, and how to honestly determine your actual trading leverage. Your brokers most likely tout that you have a 400:1 leverage account. This means nothing to us, other than if you think actually trading at 400:1 leverage is a good idea, you are a fool.

What it does mean is that the required margin deposit per open position is very low. This is a good thing right? Well yes, I suppose so. When it becomes a bad thing is when you decide to start leveraging your trades more than 5:1 per entry. Remember, leverage magnifies both gains and losses equally. Also remember that the broker is taking the other side of your trade. He wins when you lose. He would love it for you to trade like a fool.

Your actual leverage is calculated by taking your net open trade position size and dividing it by your account equity balance. So if you have a total open trade position of 250K, and an account equity balance of $10,000, your actual leverage in use is 25:1.

25:1 leverage is a dangerous level to play with if you want to trade for more than a few months. Once you get on the right track, and can hit more winning trades than losers, we will revisit the leverage issue. But until then you need to play it more conservatively.

We eventually learned to only trade at a maximum 4:1 leverage per trade entry. But we try to add to winning trades as they take off in our favor. So we might end up with half a dozen open entries at 4:1 leverage each, for a combined 24:1 leverage. We are smarter now about how we get there and that is one of the things we shall try to teach you.

So let's make our default trade size a maximum 4:1 leverage trade. Lets also assume that Fridays are not a good day for a beginner to trade. Trust me on this. And lets make it your goal to lock in a net 20 pips gain every day at 4:1 leverage. It can be a single 20 pip gain, or (2) 10 pip gains, or (4) 5 pip gains, the point is it’s all the same in the end.

The math comes out to this fact. Trading (4) days a week, locking in 20 pips profit a day at 4:1 leverage, your actual return on investment for that week is 3.2%. You scoff at a measly 3.2% right? What a waste of time you say...you could not be more wrong!

Even If you never increased your trade size the entire year, only kept your initial investment in the account, and stayed true to your 20 pips a day goal, that measly 3.2% weekly gain is an annualized 166.4%rate of return on your investment. Still scoffing at that? Didn’t think so.

Now many of you will do the math to check for errors. That is expected. Lets say you have a $10,000 forex trading account. In the above scenario your default trade size is 40K ($10,000 x 4). You manage to net your goal of 20 pips a day for a weekly total of 80 pips per 10K lot. So you take your 80 pips profit per lot x 4 lots per trade and you come up with 320 total pips for the week.

A mini account pip is worth $1 per lot on most pairs. So for the week you made a profit of $320. Big deal you say, that is hardly worth the effort and I can’t pay the bills on $320 a week.

Exactly! You cannot trade for a living with a $10,000 account and expect to stay around more than a few months. You will always be trying to hit grand slams and your stops will become very wide as a result. You will lose your shirt in no time flat. Retail Brokers count on this.

If you want to trade for a living, you need to figure out how much you need to make a week to live off, add a margin for unexpected expenses, and plug that into your goal as the outcome. Then work backwards to what size account you need to start with in order to be able to trade the goal and afford to pay the bills. Then you need to assume that you will not always make your goal no matter how hard you try.

In the mean time, keep your job, trade in your spare time, trade your goal, take your measly 3.2% a week profits and build your account to the point where you can afford to trade full time. By the time you manage to build your account up to that point, you obviously will have mastered the art of trading for your goal and the transition will be easier for you to handle.

If you cannot be satisfied with an uncompounded annual return on your investment of 166.4% you are a complete idiot and have no business trading currencies.
In the next article we will talk about various methods to help you reach that 20 pip a day goal.

Marcus Locke aka “MakoML” is an offshore fund manager at Mako Fund Management Group and specializes in discretionary FX trading. In addition to trading, Marcus and Associates provide subscription based FX & related market analysis and trade suggestions for professional traders and industry associates. For more information please visit their websites at MakoForex.com.