I am starting this thread because many have misunderstood that the number of pips is the indicator of profitability.
If someone says that he/she is making 100 pips a day, some might think the he/she could grow from $100 to $1 Million in no time, probably in a few days. However, that is not the case.
Let's see how fast someone who could consistently make 100 pips a day makes a million from $100.
Assuming he trades 1 trade a day, starting with 0.1 lot.
Balance
Day 1 = 0.1x100 = $200
Day 2 = 0.2x100 = $400
Day 3 = 0.4x100 = $800
.... and so on...
He could double his balance everyday. It will only take him about 14 days to make $1 million. But why we don't see people achieving this result?
It is because of the reward-risk ratio and the hit rate.
When you have $10,000, and you only wanted to risk 5% ($500), assuming your reward-risk ratio is 1:1, your reward would be ~$500 (~5%). If your reward-risk ratio is 2:1, you could expect a reward of ~10% on each winning trade.
Now, let's assume that your winning rate is 50% and you have a reward-risk ratio of 2:1, regardless of how many pips your stoploss or takeprofit are, you are bound to make the same amount of money. For instance, If your stoploss is 5 pips (1 pip of spread) ,your take profit is 10 pips and you are risking 5% of your balance, you would have a 50% chance of making 10% or a 50% chance of losing 5%. With such a scalping strategy, you could easily make 10 trades daily. Let's calculate how much we can make in 20 days. Assuming we are risking 5%, our expected return is ~25%.
Balance
Day 1 = 1.25x100 = $125
Day 2 = 1.25x125 = $156
Day 3 = 1.25x156 = $195
.... and so on...
After 20 days we would get $8673. Not bad at all. It takes us about 42 trading days to get to 1 Million. Pretty fast isn't it?
Therefore, when you design your system, you have to take the reward-risk ratio and the winning rate into consideration, and not the number of pips the system could make. A system could make a 1000 pips a day, but if the reward-risk ratio is 1:1, he would only generate ~5%, which is lesser than the system which makes 10 pips a day.
Of course, these all assume that you place your trades based on the percentage of your equity. Also, these are all theoretical, it might and might not help you in your actual trading.
If someone says that he/she is making 100 pips a day, some might think the he/she could grow from $100 to $1 Million in no time, probably in a few days. However, that is not the case.
Let's see how fast someone who could consistently make 100 pips a day makes a million from $100.
Assuming he trades 1 trade a day, starting with 0.1 lot.
Balance
Day 1 = 0.1x100 = $200
Day 2 = 0.2x100 = $400
Day 3 = 0.4x100 = $800
.... and so on...
He could double his balance everyday. It will only take him about 14 days to make $1 million. But why we don't see people achieving this result?
It is because of the reward-risk ratio and the hit rate.
When you have $10,000, and you only wanted to risk 5% ($500), assuming your reward-risk ratio is 1:1, your reward would be ~$500 (~5%). If your reward-risk ratio is 2:1, you could expect a reward of ~10% on each winning trade.
Now, let's assume that your winning rate is 50% and you have a reward-risk ratio of 2:1, regardless of how many pips your stoploss or takeprofit are, you are bound to make the same amount of money. For instance, If your stoploss is 5 pips (1 pip of spread) ,your take profit is 10 pips and you are risking 5% of your balance, you would have a 50% chance of making 10% or a 50% chance of losing 5%. With such a scalping strategy, you could easily make 10 trades daily. Let's calculate how much we can make in 20 days. Assuming we are risking 5%, our expected return is ~25%.
Balance
Day 1 = 1.25x100 = $125
Day 2 = 1.25x125 = $156
Day 3 = 1.25x156 = $195
.... and so on...
After 20 days we would get $8673. Not bad at all. It takes us about 42 trading days to get to 1 Million. Pretty fast isn't it?
Therefore, when you design your system, you have to take the reward-risk ratio and the winning rate into consideration, and not the number of pips the system could make. A system could make a 1000 pips a day, but if the reward-risk ratio is 1:1, he would only generate ~5%, which is lesser than the system which makes 10 pips a day.
Of course, these all assume that you place your trades based on the percentage of your equity. Also, these are all theoretical, it might and might not help you in your actual trading.