Through the years I heard many times about the 20 pip a day strategy. “I’ll just make 20 pip a day and I am free to stop working”. It always surprised me that people think this will work and I have to admit I thought it myself when I started (what makes me a fool as well). Every time I hear it I have the urge to explain why it is not working, but didn’t had the energy to do so. Now I have the opportunity to share my thoughts about it.
Lets start!
20 pip a day, means 400 pip a trading month. The first catch is that this assumes that you will make 20 pip a day everyday, which can be difficult. If you can do that, you better stop reading as I will waste your time.
Let us assume that not all days are profitable and that your month results look like this:
1 20 20
2 20 40
3 -45 -5
4 20 15
5 20 35
6 20 55
7 20 75
8 20 95
9 -30 65
10 20 85
11 20 105
12 20 125
13 20 145
14 20 165
15 20 185
16 20 205
17 -15 190
18 20 210
19 20 230
20 20 250
12,5
This is a month of 4 weeks with each 5 trading days and an easy trade a day. Optimistically let us assume that you have only 3 loss days. With a max of 20 pip a day profit this will total up to 250 pip in this month or 12,5 pip a day.
But this is not what we want, we want 20 pip. So we have to make more pips a day to reach our target. Let us do 30, to make up for the losses.
1 30 30
2 30 60
3 -45 15
4 30 45
5 30 75
6 30 105
7 30 135
8 30 165
9 -30 135
10 30 165
11 30 195
12 30 225
13 30 255
14 30 285
15 30 315
16 30 345
17 -15 330
18 30 360
19 30 390
20 30 420
21
Yeah, we have reached our target!!! 21 pip a day!!! Done deal. Easy lesson, aim higher and we are okay, thanks IdeFX!!!
Hold on, hold on!!! Because you sufficiently backtested this system, you know that 20 pip was a good target because the loss days are limited to only 3 in the month. But what if our target becomes 30:
1 30 30
2 30 60
3 -45 15
4 30 45
5 30 75
6 -20 55
7 30 85
8 30 115
9 -30 85
10 30 115
11 30 145
12 -30 115
13 30 145
14 30 175
15 30 205
16 30 235
17 -15 220
18 30 250
19 30 280
20 30 310
15,5
Hmmm, our analysis shows that that means that there are only 2 more loss days, that looks okay. But wait, the average is now 15,5 pip a day. That is still 4,5 pip short of our target. Let us raise the pip a day again like the last time.
Well to keep it short, 37 pip would be the new target, but will probably lead to more loss days and we will still not be reaching our target, and so forth. But I think you get the picture.
Now, 15,5 pips is still a good target lets go for that. Sure, excellent plan you just need to raise your stakes and you will be fine… at least if you have the real strategy you need, namely how to actually make 37 pip a day.
Another idea is to limit our losses an uneducated guessed 20 pip!!! That will limit the losses, what will result in a better performance. Hmm, sounds like a plan. Let us work that one out!
1 20 20
2 20 40
3 -20 20
4 -20 0
5 20 20
6 20 40
7 -20 20
8 20 40
9 -20 20
10 20 40
11 20 60
12 20 80
13 -20 60
14 20 80
15 20 100
16 20 120
17 -20 100
18 20 120
19 20 140
20 20 160
8
Ohhh No!!! The randomly choosen stoploss triggered 3 premature stopped trades!!! Now we are back to 8 Pip a day, instead of the 12,5 pip!
Well I think you catch the drift. The idea is easier said than done, and you also need a system to actually catch the right trades to reach the 20 pip a day. Base your system on catching profitable trades instead of a fixed target. If you have such a system, you may actually have an average of 20 pip a day and you will still be reaching the target. But if you think that just trade and stop at 20 pip profit per day is a good system, I hope I’ve learned you that you need to go back to step one and rethink your decision and don’t spent too much time on this on.
Happy trading!
IdeFX
Go for an average of 20 pips a day instead of stepping out when you reach 20 pip just because you want to have 20 pip everyday…