One question that’s been on my mind during my schooling is about money management, risk/reward and so on. There’s countless schools of thought that hover around a) using a pip/percentage target system or b) using a fixed figure target.
I’m aware that one can access different leverage/margin opportunities and this can measurably increase the profit/loss potential on each trade. But from my perspective, the purpose of considering being an active/pro-trader is that it could relieve me of a need to earn income elsewhere. Irrespective of what sized trading account I go live with, or what percentage or PIP amount I make each week - if the end result isn’t a particular dollar amount to cover my living expenses - then I’d still need to earn income elsewhere.
Some examples. Let’s say my monthly expenses are $3,000.
If I open a trading account and deposit $5,000 - and only have positions open to total a maximum of 10% of it per instance, then using a broker with a 200:1 leverage/margin - I could open positions up to $100,000. e.g. my PIP value here is $10 give or take. So in this scenario - I’d need to profit by at least 300 pips, per month to cover my expenses.
If I instead, deposited $50,000 using the same ratios above - then I would only need to profit 30 or more pips per month, as I could open a position of $1,000,000 using $5,000 of my capital. My risk:reward ratio hasn’t changed, I’m doing the same as I was before - but using a bigger account size, enables me to seek a smaller PIP or dollar target per month.
I’m aware that if I only opened with $500 - then I’d be seeking 3,000 pips per month, which I think is unreasonable.
In any case I don’t think a 30 pip target per month is unrealistic. It could be one trade that earns this. I also don’t think that 300 pips per month in profit is unrealistic.
I’m also clear that many traders who start out might not literally have lots of capital, so either their risk would need to be greater, or they’d need to be happy with a smaller return each month. For me - the notion of trading, and concept revolves around it being a good use of capital, and being somewhere that could eventually cover my expenses so I could trade ‘for a living’. Regardless of what account size I open - I guess I’m perplexed at whether I should look at my account opening size and then make my targets, or whether I should stick to a more fixed target model?
The thing as I’ve read around the web, on forums, and on countless ‘summaries’ of what mistakes beginner traders apparently make is that newbies, seem to open on the average smaller sized accounts, but trade in faster time intervals, and seek higher rewards to cover their early stage losses (which, as are ongoing losses; inevitable), yet, longer term ‘pro-traders’ who probably have more in their capital accounts, do longer term time frames, and make more money. The thing is - the longer term traders, on the assumption they have a lot of capital in their accounts - could presumably trade larger lot sizes on the same ratios - and make ostensibly a lot more profit.
Of course if you keep escalating my example above out - a trader with $1m of capital in their account, could use 10% of it for a position of 20m units where each pip value = approx $2,000. Of course for them to clear 1.5 pips + whatever the spread is would yield the same dollar profit as the trader with a $500 capital account who needs 3,000 pips to get the same dollar profit.
The pip movement in a trade, assuming a different lot size/position size but the same ratio - will yield the same percentage in profit/loss. but the dollar result on the account, actual dollars banked/lost are vastly different.
I wonder if anyone can shed light. In my case - I’m looking at this specifically as a career - and I’m sure many others do too. I’m therefore totally realistic in my belief that unless I can support my financial needs without over leveraging or over-risking, then I need to refine my goals - otherwise I risk getting too aggressive to support my goals rather than remaining steadfast to the plan.