Great Trading System? 500 Pips A Week
Number one, let's make this completely clear - It matters NOT how many Pips you make each day
, week or month. What matters most is HOW those Pips are made. And by this we do not mean that it matters what instrument you trade, when you trade, how many times you trade, how substantial your trading account is, etc. No, it's much simpler than that."Newbies" (a word we personally hate) often get lured by sales and promotional material with headlines such as 50 Pips A Day, 200 Pips A Week, etc. The material more often than not demonstrates no end of winning trades, "unsolicited" testimonials, fabricated performance coupled with constant peddling by those interested only in lining their own pockets.
We are not implying that all vendors do this but there are many that do. However, even if we can trust the enticing headlines we need ask just one primary question and apply some basic maths to tell us a lot of more of what we REALLY need to know.
BHow Both trade cable (GBPUSD) and are Simple once a day Set & Forget systems. Which one would you choose?
System 1 - 500 pips per week
So, simply follow this system, trade at just 1 a point and make 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 works like this. You risk 2,000 Pips on each trade to make 500, a massive Risk:Reward of 4:1. That's the only answer we need.
Now, we translate this into monetary terms, it's quite Simple.
To make 500 a week (based on the headline claim of 500 Pips) we will need to risk 2,000 on every trade. Adopting the industry standard Risk profile of 2% per trade that means we need a starting account balance of 100,000.
System 2 - 200 pips a month
Only 200 Pips a month! Seems a little mean based on the fact 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 like with like we will assume that System 1 does work and delivers 2,000 pips a month, the actual 2,000 a month at 1 a point mentioned above.
For System 2 to return this same amount each month, we need to divide 2,000 by 200, the number of Pips made every month. This means we need to trade at 10 a Pip as a result risking 200 per trade.
So, Which system Is The best
The answer is probably already obvious but a little simple maths makes it clear.
To use System 1 we have already determined 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 assuming 2% risk per trade this means we need a starting account balance of just 10,000. If we accomplish our 200 Pips each month it equates to the same return as System 1 (2,000) but now we are looking at a 20% return per month, in relation to our starting account balance.
Not convinced yet? There is one additional sum you can do to check the validity of a product. What happens if I have 5 losers in a row, don't think it can't, it can and it will. Well, with System 1 we will experience a 10,000 drawdown, with System 2, just 1,000. In both scenarios this equates to 10% of our account balance.
Conclusion
We pay careful attention to this straightforward formula when conducting all of our Trading system and Signal service reviews. In actual fact, on occasion, we have decided not to go ahead with a review after carrying out these simple sums. We urge every trader, especially those new to trading, adopt a similar routine.
Great Trading System? 500 Pips A Week
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