Please verify my trading philosophy - less pips, higher volume?

Beginner Questions
1

To start, I must declare that I am an absolute newbie. Never traded a single cent on a live account.

I’ve deduced that the aim of the forex game is earning pips. As long as you can earn and keep more pips than you lose, then you win!

But earning and keeping pips is no easy tasks. The more pips you aim to earn from a trade, the more risk you expose yourself to. So I’m thinking, if i set my sights on a smaller number of pips but scale up the volume of my trade, I could be more successful.

Instead of trading 0.01 lot with the goal of earning 100 pips, if i trade 1 lot with the goal of earning 1 pip, I can make the same profit with a higher probability of success? Especially with a highly liquid currency pair.

Can someone verify if what I’m thinking makes sense? Or am I missing an important detail here?

2

Yes you are missing very important fact that is risk management you need to study more about it.

Lot size is relevant to the risk you are willing to take if you have 100k equity then 1 lot is not a problem if handled carefully.
If you have lower equity then 1 lot would not be your good choice.

3

If you reduce your pip target far enough it eventually becomes a coin toss, as there is no way that technical analysis can be sufficiently accurate over the very short time it takes for a pair to move that far. You will still probably also wish to ensure that your profit target is at least twice as far from entry as your stop-loss: at very low pip levels, this makes you stop-loss much easier for price to hit through sheer volatility / “noise”.

And you need to allow for spread, which brings your stop-loss nearer and pushes your profit target further out, amplifying this whole problem.

I don’t daytrade or scalp - I am cr@p at these systems, but I believe its chasing a false impression of safety from risk anyway.

4

This is not necessarily true. See positive points, negative profits.

5

triple your demo account, then use 1/3 of your margin, or allowance per trade total.

Aim for 8 pips TP,

50:1 leverage,

7

HI mate
let’s analyze what you’ve said

  1. You’re a newbie
    ok… so understand what that means, (no offense) it means you know nothing, but you think you know.

(now before i go on, and you think i’m being a bastard, let me clarify this)
i’m not being rude ok
i’m just saying, i was you around 5 years ago
and today… well. hehe it’s bloody awesome
but, it wasn’t easy

now… ironically , i trade pretty much the same thing that you’re explaining EXCEPT WITH A DIFFERENCE

and the reason i’m speaking to you like this is
i’ve found, YOU NEED TO UNDERSTAND AND ACCEPT WHERE YOU ARE IN TRADING if you are to succeed.

ok

now moving forward
2. YOU SAID "I’ve deduced that the aim of the forex game is earning pips. As long as you can earn and keep more pips than you lose, then you win!

ANSWER : NO, THAT’S INCORRECT
(now here is where i explain why YOU THINK YOU KNOW and why you lose)
mate, it’s because YOU MISS THE FINE DETAILS

here is your mistake
MATHEMATICALLY SPEAKING

IF you always keep the same lot size, YOUR THEORY IS TRUE
but… you didn’t say that
you missed that

so, if you win 5 trades at 0.01 lots and each trade is 10 pips, you’ll win $5
but then on the 6th trade if you pump it up to 0.10 lots and you lose 10 pips
you actually are at a loss of $5

but if you kept your lot size the same you can then average your win to loss ratio
SEE HOW THAT WORKS

  1. NO ONE EVER WINS ALL THE TIME, that just doesn’t happen,
    and Theoretically, IF IT DID HAPPEN, the Forex market would go broke in a matter of days and then…
    that person would no longer have an income hehe
    so… it never happens

  2. you said
    "The more pips you aim to earn from a trade, the more risk you expose yourself"

THIS IS CORRECT
however it’s not as black and white as you make it out
because “RISK” is a relative term

RISK is not only comprised of pips
let’s put it this way
i could tell you right now that’s it around 90% Likely that i could pull in 80 pips from a non farm payroll session
and that would take around 5mins or less
and… THE RISK
well… the way i do it… the risk is very low, because the market is moving quickly in a particular direction

so there are other factors involved
such as

Volume
What indicators you are relying on
what news you are reading
what time frame you are looking at
Likely hood of failure (Which, in itself is big subject)
You’re expectations
Your Limited Experience in itself GREATLY INCREASES YOUR RISK, without anything else involved
Your emotional state
whether you are hungry or not

ALL OF THESE THINGS FACTOR INTO RISK
if you omit any of them out of your calculations, YOU INCREASE YOUR RISK because you left i out

so… you’re right… sort of
but then again, you’re over simplifying it

now … to get to the guts of what you want to do

Mate, i trade this way, and i do it successfully

i trade like this

i do my back testing and research and stuff
and when i’m ready and i’ve planned my trade

i place a trade
i set a take profit of 6 pips (that’s it , no more than that)

now, i know i can get more , BUT, I DON’T HAVE TO
I REACH MY GOAL DOING IT THIS WAY

i do between 6 trades to around 15 trades a day
it all depends

DEPENDS ON WHAT ???
it depends on when i hit my goal of 2%

i aim for 2% a day of my total account balance

now , if you average this out mathematically
this is how it works
ultimately, i risk 1.6% a day of my account to make 2% a day

now, that risk of 1.6% is my worst case scenario
realistically i usually end up being around 0.8% and making 2%

so… since i’m trading smaller
and
all my trades are the same lot size

i can then …

  • Test myself and see my loss to profit ratio, which, as a fact , ends up being no worse than…
    for every 12 trades, i get 2 losses
    but usually it’s more like 15-17 trades and i get 1 loss

but i work off an average of for 10 trades i should expect 1 loss
now… that’s ME … WITH MY 5 YEARS EXPERIENCE (Remember that)
because you can’t just jump in and do what i do
you have to do what works for you

as a fact, when i started, i swore i wouldn’t scalp.
but… over time, i learned that it works for me
so… yeah.

now as for larger lot sizes

yes… on one hand using a lower lot size decreases risk
so we are taught not to raise it

but, then again,
0.01 is based on , let’s say you have $1000 in your account
and you do 0.01 and you aim for a profit of 50 pips

well. if you aim for a profit of only 6 pips you could higher, because the SHORTER TRADE TIME
reduces your exposure to the market, hence LOWERS YOUR RISK

but, i think you have this all wrong

you’re probably thinking the lot size should be like 1.0 standard lot or something… right ?

Mate, i’ll put it like this to you

when i started live (When i knew what i was doing )
i started with $1500
i traded 0.04 Lots

ok

as a general rule, (when Using MT-4) Keep and eye on your Margin Level %

so, if you like
Set the Lot size to whatever you want
BUT… HERE’S THE CATCH

Your Margin level % Must NEVER DROP BELOW 1000% (one thousand percent)
if you can keep it above 4000%, that’s very safe

also don’t trade more than 2 trades at any one time
and… whatever trade size you choose, stay on that lot size and figure out what the percentage is that you’re using, relative to your account size

and KEEP THAT PERCENTAGE CONSTANT as you grow
also KNOW WHAT YOUR WIN TO LOSS RATIO IS

so… if you find that for every 4 trades you lose 1
you need to adjust your Lot size to accomodate for your lack of experience

oh, lastly
i FOUND THIS WAS A CHARM

at some point, you’ll be frustrated and you’ll be like “Man… i gotta learn how to win more trades, i’m losing too many of them” hehe

NO MATE
here’s what you do

let’s say you lose 15 trades, and you win 1 (yes, that sux)
well. if the following week, you lose 12 trades, but win 1

YOU IMPROVED, so … don’t feel bad

don’t try to increase your winnings
FOCUS ON DECREASE LOSING TRADES

because that enables you to learn
HOWEVER, if you focus on getting more winners, you neglect to learn why you are losing

i think that should answer your questions
but yeah, shorter pip goal is better

also, here’s another thing i do. TO REDUCE RISK

i’ll enter a trade

remember my goal is 6 pips
so…
when it gets to 3 pips in profit, (and that usually happens pretty quickly)
i’ll then put my stop loss at 1 pip profit

THAT WAY, i’m GUARANTEED NOT TO LOSE
even if it hits my stop, it doesn’t matter

look

let’s say you have $1000 in your account
let’s say you trade 0.01 lots and you want to make 6 pips, so 60cents
now. i trade with and ECN, so no spread, they just take a commission, it’s like 8 cents on a 0.01

so, when i open the trade, THERE IS RISK
but, my stop loss is at 20 pips, so i’m risking $2 on a 0.01 lot size

now that doesn’t make logical sense when you look at Profit/Loss ratio

but when you consider THE STATISTICAL LIKELY HOOD OF FAILURE over 6 pips in a space of 5 mins.
it’s not very likely

Actually, it’s never happened to me hehe (that i lost 20 pips)

so, when i get 3 pips in profit, i set my Stop loss for 1 pip, so… 10 cents - the commission of 8cents
so… if it hits my stop loss, i STILL PROFIT 2 CENTS

now. if you think about this
and if i never had 1 single trade to hit my take profit, and it only hit my stop loss
I WOULD ALWAYS WIN

because at 0.01 lots 2 cents profit per trade, at 10 trades a day, is still $2 per day

and if we are looking at 1.0 lot which is $10 per pip, same applies
i would still be making $80 per day (which is what most people make in an average job)
Not that you should be aiming for that

but realistically
because 6 pips is so bloody close
it hits it pretty much every time,
every now and then i get a loss,… no biggie

so if you look at 2% a day growth, over 245 trading days
you end up with something like 180,000 dollars before taxes per year
and… that’s not bad, considering

a) thats only the first year
b) you only score 6 pips at a time

what you need to remember though is this…
when there is a big move, like a 200 pip move

YOU NEED TO STAY OUT OF IT

remember, you are just in it for 6 pips at a time,
do that, and you should be ok

8

The important detail you’re missing is that the smaller pip numbers you aim for, the bigger becomes the cost of the spread. The second thing is, what happens when that big volume trade goes against you?

9

First of, thank you everyone for your replies. Yes, I understand there needs to be proper risk management. I think one thing I probably didn’t emphasize properly was that my question is focused on the [B]probability of winning[/B]. So my question really should have mentioned that risk management aside and all other factors held constant, is the probability of winning with smaller pips, larger trade volume, higher than with more pips, smaller trade volume?

Special thanks to Martin K. for your lengthy explanation. That was all very useful!

No offense taken, but in fact, I don’t think I know anything, which is why I’m asking you guys.

I’m actually thinking I won’t go anywhere near that big when I first start live trading. The reason I asked this question is because I’m thinking of starting off strictly with 0.01 lot sizes and observe my success rate. I’m thinking that if I achieve a certain level of success, that I can replicate that success with a larger lot size and thus amplify my profits later on.

I like this strategy. However, if I am looking at a short time frame, how can I enter the stop loss that fast, before the price changes? The only way I can think of accomplishing that is if I have a HUGE stop loss to begin with and modify it as soon as I hit 3 pips profit? I would imagine this would also entail watching the price very closely which seems like it could become very stressful.

10

Would having a larger stop loss solve that problem?

Is the risk of trading on a shorter time frame higher than on a long term trade? I have always thought that scalping is, in an ironic sense, actually safer because you get in and out of the trade really fast, whereas with a long term trade, you have to take into account swap charges and you’re more susceptible to major headwinds, the longer you are in the market?

Like I said, I’m a newbie, so those are just my unsubstantiated thoughts.

11

A stop-loss that’s further away should have a corresponding effect on the profit target, to maintain your risk:reward. So a stop that is at 20pts down should have a profit target at 40pts up. But if you drop the stop by 1pt to 21, you ought to increase the target by 2 to 42. But this is theory - I hold to the view that a stop and target have to be dictated by the TA, its just wishful thinking to set them where you like and hope for a good result.

Lots and lots of small trades are a way to keep risk small per trade but it demands lots of screen time, very fast and sure reactions. Its not cost-free either. Its very demanding to carry out good TA in real-time at high speed, and this can make daytraders simply momentum traders, i.e. jumping in long only because price rose in the last 3 minutes. Closing out trades each night also causes an over-focus on return per day: this is unhealthy and causes stress in its own right.

There is too much concern over surprise price moves while traders sleep. These can be planned for with stops so you sleep peacefully. In any case, some surprise moves can be positive and its nice to be in the market already when they occur.

PS: Surprising how many daytraders don’t like to set stops.

12

Yeah, makes no sense, ( No Stops), Just careless trading.

13

There are bold traders, and there are old traders - but there are no old bold traders.

Old quote but very true. Play without stops and your career will end in tears sooner or later. It’s guaranteed.

14

Hi mate
RE Your comment on PROBABILITY.

You can’t say “what is my probability of winning, but LEAVING OUT RISK MANAGEMENT”

that’s like saying
if i toss a coin 5 times what is the probability of Heads coming up every time
but, LEAVE OUT The speed of the spin or Wind Resistance
YOU CAN’T DO THAT .

Risk Management Forms a Critical part of your probable outcome

Moving forward
re this comment

I like this strategy. However, if I am looking at a short time frame, how can I enter the stop loss that fast, before the price changes? The only way I can think of accomplishing that is if I have a HUGE stop loss to begin with and modify it as soon as I hit 3 pips profit? I would imagine this would also entail watching the price very closely which seems like it could become very stressful.

Mate, you sort of confused me here.
i mean… yeah… not sure what to say here other than to assume that you’re not really familiar with MT-4

so … let me say it like this

i use MT-4 as my trading platform
if i want to get in on a price, EXACTLY where i want it… I use a Pending order (usually a Buy Limit, or Sell Limit)
when you do that
you pre determine the following

Entry Price
Take Profit Price
Stop Loss Price

The Stop Loss Price is usually around 20 pips in the opposite direction

Now, if you’re asking,
when the price goes in my favour by 10 pips, how do you move the Stop Loss Line to be in profit by 1 pip
that quickly

well. there’s 2 ways

  1. Usually it doesn’t move that quickly, even on a 15 min Chart,
    and you usually have time to go in and click on MODIFY and edit the stop loss price

  2. HERE’S A TRICK OF THE TRADE (i kicked myself for not knowing this, once upon a time)
    do you realize that the RED STOP LOSS line, is actually Drag able.
    yes… YOU CAN DRAG IT TO WHERE YOU WANT IT
    and then just hover the mouse over it and it’ll tell you the profit at that price

so… even if your are Non Farm Payroll environment, where, you WILL NOT GET A CHANCE to manually
change the price.
you still can drag that line to save your arse, it takes literally 1/2 second to 1 second
and… depending on your broker and execution time,
my broker is instant execution, but i’ve had some shonky ones that lag by 10 seconds or more before
they execute it at a loss

but, yeah, you can drag the line

2 Likes
15

oh, one important point i forgot to cover

STRESS.
you need to get a handle on this, before you attempt trading

but, to answer your comment

No mate, i don’t find it stressfull at all

i usually set a Pending order
my stops are there
my take profits are there
i just monitor it

i usually look at the screen every 30 mins to 1 hour
sometimes, Every 4 hours

Not Stressful at all

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