Hi,
The idea of making 20 pips per day and compounding your money sounds deceptively simple. It might lead new traders into thinking that their profit targets for each of their trades should be 20 pips. (Actually 20 pips plus the spread.) From a Risk:Reward ratio, this type of thinking can be detrimental to your trading account.
Why?
Let’s say that for every 25 pips you want to make, you are willing to risk 25 pips. You have a 1:1 risk:reward ratio. Now, since we all have losses, let’s say that on your first trade you lose 25 pips. In order to realize a net 25 pips from where you started, you need each of your next two trades to net you 25 pips for a total of 50 pips. If you make only 1 trade per day, 3 days of you first week has elapsed. With only two days left there is no way that you will make the 100 pips per week following this trading plan.
However, if you change your risk:reward ratio from 1:1 to some higher ratio, let’s say 1:5, then for every 25 pips you are willing to risk you will make 125 pips as a reward. Can you see the difference. If your first trade was a loss and you lost 25 pips, you have the same loss as the above example. If your next trade was a winner, and you made 125 pips, you are up 100 pips net and have made your weekly goal. As a matter of fact, you would no longer be tied to your computer for the rest of the week.
Compounding is great, but it has to be seasoned with the realities of trading.