Great Trading System? 200 Pips A Week
To start with, we would like to make something completely clear - It matters NOT how many Pips you manage to make day in day out. What matters most is HOW you make those Pips. And by this we do not mean that it matters what market you trade, at what time you trade, how often you trade, how large your trading balance is, etc. No, its much more straight forward than that.
Those new to trading regularly get roped in by sales and promotional hype with headlines like 100 Pips A Day, 500 Pips A Week, etc. The hype regularly illustrates endless successful trades, "unsolicited" testimonials, falsified Trade history together with no end of peddling by 3rd parties interested only in lining their own pockets.
We are not saying that all those selling systems do this however there are many that do. But, even if we can rely on the enticing headlines we need ask just one primary question and apply some rudimentary maths to tell us a lot of more of what we REALLY need to know.
Below we have identified two hypothetical Trading systems, however they could just as easily be real. Both trade cable (GBPUSD) and are effortless once a day Set & Forget Trading systems. Which one would you pick?
System 1 - 500 pips per week
So, just follow this strategy, trade at just £1 a point and take home £500 a week or £2,000 a month. Impressive enough, until we ask our primary question:
- What is the Risk:Reward per trade?
System 2 operates as follows. You risk 2,000 Pips on each trade to make 500, a huge Risk:Reward of 4:1. Thats the only answer we need.
Now, we translate this into actual money, its relatively easy.
To make £500 a week (based on the headline claim of 500 Pips) we will have to risk £2,000 on each trade. Using the industry standard Risk profile of 2% per trade that means we require a starting account balance of £100,000.
System 2 - 200 pips a month
Only 200 Pips a month! Sounds a little mean bearing in mind System 1 returns 2,000 Pips a month (10 times more). However, System 2 has a Risk:Reward per trade of 1:2, it risks 20 Pips per trade to make 40.
To compare apples with apples lets assume that System 1 does work and delivers 2,000 pips a month, the actual £2,000 a month at £1 a point mentioned previously.
For System 2 to return this same amount each month, we need to divide £2,000 by 200, the number of Pips made each month. This means we have to trade at £10 a Pip thus risking £200 per trade.
So, Which product Is The better
The answer is most likely already obvious however some basic maths makes it clear.
To use System 1 we have previously worked out that we need a starting account balance of £100,000. We risk 2% per trade, £2,000 to make £500 a week or, £2,000 a month. A return of 2% a month.
System 2 risks £200 (£10 a Pip) per trade so based on 2% risk per trade this means we need a starting account balance of just £10,000. If we pull off our 200 Pips every month it equates to the same return as System 1 (£2,000) however in this instance we are looking at a 20% return per month, in relation to our starting account balance.
Not sure yet? There is one further bit of maths you can do to check the validity of a strategy. What happens if I have 5 losers in a row, yes, this is highly feasible. Well, with System 1 we will end up with a £10,000 drawdown, with System 2, just £1,000. In both cases this equates to 10% of our account balance.
Summary
We pay wise attention to this Simple formula while conducting all of our Trading system and Signal service reviews. In reality, on occasion, we have chosen not to continue with a review after performing these simple sums. We believe every trader, especially individuals new to trading, adopt a comparable routine.
