i would like to open a discussion regarding ROI targets in our trading.
as we all know this is a business and as a business growth, targets, risk management have to take priority.
Lately I have read threads regarding 20% a month 5% 100% a month being attainable. Some experienced traders, as well as i myself have found that pip:$ ratio is, whether we like it or not, a breaking point in our psychology.
leaving pride aside 10$ per pip, begins to cloud my mind .10$ is a breeze, 1$ is manageable however 10$/pip means that a 15, 20 pip stop loss (granted our timing is right, stops MUST NEVER correlate with psychological comfort or arbitrary % per account because it WILL BE HIT)
stop losses MUST always take our objective analysis, and volatility into account, you want to place a stop where it will not get hit, however if it does get hit the loss should be negligible, which means your analysis and your timing must be Right, and your reason to trade MUST be in your favor)
10$/pip means that a 20 pip stop will take 200.00 of your account, death by a thousand stops and you will be broke.......however i digress.
this post is intended for realistic target settings, and risk management.
with a $1,000 account we want to set a target of 5% per month and compound it....correct? with the same strategy same position size to account ratio, as to grow psychologically along with our account.
so by the first year our account would have grown by 88.56% (great return, and at this stage it is doable)
we need
1 to capture most of the monthly move at monthly ATR for the last 12 periods=1yr at 738 pips so that means that we need to catch
starting jan 6.78% all the way to dec 11.59% of the monthly Range the reason why dec is higher is because our gains will need to compound therefore to remain at 5% consistently we need $50 the first month but by dec we need $85 gain a month.
Sounds reasonable so far, however if we are managing our risk exposure and we will trade with the same relative risk, relative size, ratio viz a viz our account then we need to figure out position sizes and risk exposure.
how much % per trade should we risk to attain 5% monthly return?
and how much leverage should be used to do so?
so 1:1 leverage means that $0.10/ per pip needs 500 pips to make 5%
This fact indicates that you need to catch 67.8% of the monthly Range. how likely are you to do this consistently?
so we adjust our leverage to satisfy that at .20/pip 1:2 this means that you need 250 pips for 5% catching 33.9% of the monthly range (more reasonable, however your risk exposure increases)
2% of account risk per month allows you to lose 100pips at 0.20 however now you need 5.10% of that to reach 5% ROI target. This is still within realm of human capacity.
so now taking the same premise and using a 100k account
we just multiply our math (2decimals)
you need $20/ pip be able to arrive to 5% monthly ROI
can your psychology handle that?
that means that 2% draw down is now not $20 anymore it is $2,000
with a million dollar account you need $200/ pip then to achieve the same results and your draw down now at 2% would be $20,000
this leads me to believe that
1 you need to treat your 1000 account the same as a 1,000,000 as far as position size relative to account and risk relative to account, if you are able to grow this account all that would be needed maintain the relative size and parameters.
2 psychology does play a part when dealing with big numbers
and the 2% per trade is incredibly risky, i would say risk 2% per month.
as you want 5% a month grow.
and even this scale that i present here assumes you are a great traders that reaches your target consistently with no losing months.
so the only logical picture then is average your % gains yearly or the pressure will be too great.
psychology plays a great role when dealing with big numbers,
i can see myself growing a 1000 account more than 88% a year, but this would be detrimental as i hit bigger compounding hurdles i would hit a wall in my trading. 2% consistent returns a month means i need to risk a lot less than 2% per month.
so what is a realistic target for you?
realistic risk?
how much of a monthly move can you realistically capture?
as we all know this is a business and as a business growth, targets, risk management have to take priority.
Lately I have read threads regarding 20% a month 5% 100% a month being attainable. Some experienced traders, as well as i myself have found that pip:$ ratio is, whether we like it or not, a breaking point in our psychology.
leaving pride aside 10$ per pip, begins to cloud my mind .10$ is a breeze, 1$ is manageable however 10$/pip means that a 15, 20 pip stop loss (granted our timing is right, stops MUST NEVER correlate with psychological comfort or arbitrary % per account because it WILL BE HIT)
stop losses MUST always take our objective analysis, and volatility into account, you want to place a stop where it will not get hit, however if it does get hit the loss should be negligible, which means your analysis and your timing must be Right, and your reason to trade MUST be in your favor)
10$/pip means that a 20 pip stop will take 200.00 of your account, death by a thousand stops and you will be broke.......however i digress.
this post is intended for realistic target settings, and risk management.
with a $1,000 account we want to set a target of 5% per month and compound it....correct? with the same strategy same position size to account ratio, as to grow psychologically along with our account.
so by the first year our account would have grown by 88.56% (great return, and at this stage it is doable)
we need
1 to capture most of the monthly move at monthly ATR for the last 12 periods=1yr at 738 pips so that means that we need to catch
starting jan 6.78% all the way to dec 11.59% of the monthly Range the reason why dec is higher is because our gains will need to compound therefore to remain at 5% consistently we need $50 the first month but by dec we need $85 gain a month.
Sounds reasonable so far, however if we are managing our risk exposure and we will trade with the same relative risk, relative size, ratio viz a viz our account then we need to figure out position sizes and risk exposure.
how much % per trade should we risk to attain 5% monthly return?
and how much leverage should be used to do so?
so 1:1 leverage means that $0.10/ per pip needs 500 pips to make 5%
This fact indicates that you need to catch 67.8% of the monthly Range. how likely are you to do this consistently?
so we adjust our leverage to satisfy that at .20/pip 1:2 this means that you need 250 pips for 5% catching 33.9% of the monthly range (more reasonable, however your risk exposure increases)
2% of account risk per month allows you to lose 100pips at 0.20 however now you need 5.10% of that to reach 5% ROI target. This is still within realm of human capacity.
so now taking the same premise and using a 100k account
we just multiply our math (2decimals)
you need $20/ pip be able to arrive to 5% monthly ROI
can your psychology handle that?
that means that 2% draw down is now not $20 anymore it is $2,000
with a million dollar account you need $200/ pip then to achieve the same results and your draw down now at 2% would be $20,000
this leads me to believe that
1 you need to treat your 1000 account the same as a 1,000,000 as far as position size relative to account and risk relative to account, if you are able to grow this account all that would be needed maintain the relative size and parameters.
2 psychology does play a part when dealing with big numbers
and the 2% per trade is incredibly risky, i would say risk 2% per month.
as you want 5% a month grow.
and even this scale that i present here assumes you are a great traders that reaches your target consistently with no losing months.
so the only logical picture then is average your % gains yearly or the pressure will be too great.
psychology plays a great role when dealing with big numbers,
i can see myself growing a 1000 account more than 88% a year, but this would be detrimental as i hit bigger compounding hurdles i would hit a wall in my trading. 2% consistent returns a month means i need to risk a lot less than 2% per month.
so what is a realistic target for you?
realistic risk?
how much of a monthly move can you realistically capture?
AVT INVENIAM VIAM AVT FACIAM