$68,000,000 mathamatical compound interest question

All,
let me start by saying that I don't have the knowledge of a mathematician's little finger which is why I am posting this thread. I am interested in gathering the following information:

1. Is this even possible?
2. If possible, how probable?
3. The process of how/when the pip/lot values change to achieve the end result (this will become clear further on)

Lets assume the following for simplicities sake:
1. we reach our goal of 20 pips per day every day.
2. All things are equal, no huge news trades, no forgetting to put a stop on and blowing half your account etc.
3. We are observing all the rules of good money management, risk and dicipline
4. No money is ever taking out of the account by the trader.

Attached is an .xls of compound interest. The starting balance is $5000. The compound interest is 1% per day (I didn't create this BTW. I found it on one of the threads here). The time line is 4 years. The aim per day is 20 pips on any currency. The above are all variables but lets try to keep the end result at $60,000,000. My questions are:

1. If you know the pip value of your currency pair, how many pips would you have to make per day to achieve 1% every day? Obviously this changes as the account size increases as does your ability to trade larger lot sizes with a safe risk (1% - 2%)
2. If you did achieve 1% every day at what points along this process would you have to change your pip/lot amount to sustain the 1% growth.

The end result should be an additional column next to each month in the .xls stating how many pips you would need to make on that day to maintain the 1% growth, which would also translate into lot size. It would be awesome if you could change the value of the lots/pips based on a choice of currency, the same way the dollar value changes if you change the percentage or starting price. For example if you chose EURUSD the pip value in the columns would change to reflect the new currency pair as each pip value in each currency is different.

Thanks in advance to all those mathematical super geniuses that CAN actually work this kind of stuff out.

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seven. One for each day of the week.

Hello,

I looked at the xls file attached to your post. I have some comments.

Answers:
1) Yes it is possible. The nice thing about mathematics is it illustrates possibilities very well. Probabilities are a different story. Which leads us to...

2) Extremely, extremely unprobable. Allow me to explain.

Let's assume that you have a system - any system will do, but we'll figure that your system has a 50/50 shot at winning vs. losing on any given trade. Your chances of winning on trade 1 is 1/2, winning on trade 1 and 2 is 1/4, winning trades 1, 2 and 3 is 1/8, etc. The formula is really simple, it is:

(.5)^x

where x is the number of trades in a row.

Things don't get fun until you start talking about large numbers of winning trades in a row - let's say 10. Winning only ten trades all in a row has a very small probability of 1/1024 or .000977. In other words, you basically have a 1 in 1,000 shot of winning ten trades in row with a 50/50 system. Good luck.

How about 20 trades in a row (a whole month of wins)? You're talking 1 in about 10 million. That's only one month!

This spreadsheet you have here is assuming a win of 1% everyday for 36 months and each month has 20 days in it - or 720 days of winning trades in a row. The probability of winning 720 times without a loss is in the hundreds of trillions to one if not higher (my calculator cannot provide such a number).

How about a system that is a little better than 50/50 - let's say 80/20. Now the formula is:

(.8)^x

again where x is the number of trades in a row.

Let's see the probability of winning 10 in a row with a 80% chance of a win on any given trade. (.8)^10 = about 11%. So you have a 1 in 10 chance of winning ten in a row or two weeks worth. Not bad.

How about a whole month? (.8)^20 = 1% (or 1 in 100). Not good.

And 720 days in a row? (.8)^720 = about 1 in a few hundred billion. No good.

The moral here is that the spreadsheet is vastly oversimplifying things and you should forget that you ever saw it. It is not realistic in any sense. You should not plan to make small, consistent wins, but instead plan to keep your losses small - because they will surely come!

3) I don't think I am going to take the time to answer this question, sorry. I am not trying to be a jerk, but I don't have a clue as to how to go about it nor do I see the value in it since the chances of it happening are more remote than the universe imploding in the next billion years.

This will not happen. Probability is definintely on my side on this one!

I know I didn't answer all of your questions, but hopefully I provided some insights. If not, then just ignore my ramblings

-=DAVE=-

I understand and tend to agree with Dave about the massive improbability of this request. I am more interested in the mathematical formula that will translate amount of pips needed to earn a certain % of compound interest per day. The 1% was arbitrary. Choose 0.5% or 0.1% if that is more reasonable. I understand the point of X wins in a row is more and more unlikely as time goes on but think of it as lets say an 70% (again arbitrary number) and at the end of the week, regardless of the number of wins or losses (and keeping the losses small as Dave suggested) we end up with 100 pips. M = win, T = win, W = loss, T = loss, F = win. End of the week = 100 pips. Admittedly, if you did use 0.5% this thread would only be called $591,413 mathematical compound interest question. Not that alluring.

i dont know if this will be helpfull but here (http://www.forexfactory.com/showthre...92#post1492292) i have a similar system which i am using and thought of.

its simple but effect imo.

i dont really have a set amount of pips per day that i have to get but rather an amount; its a percentage of my equaty. ~ %3 per day (or any %).
if equaty is $1666 (for example), my goal for that day would be about 50 bucks.

daily goal achivement:

goal is $50.
which can be achieved with 1 lot
- 50 pip gain with eur/usd
- 58 pips with usd/jpy because pip value is smaller ($.86)
(and this is a 10K account btw)

or 2 lots per trade
- 25 pips gain with eur/usd
and so on

or 3 lots per trade
- 16 pips per trade with eur/usd..
and so on

if you have a smaller or bigger account ofcourse the amoutn of pips will be different. (100K/1pip = $10, 5K/pip = $.50 for EUR/USD)

heres my 2 cents.

ps. not everyday is a winner.

My 2 cents: yes it is possible, probability - we cannot estimate it as it depends on your system and you (many unknown mainly psychological factors).

It is possible to reach a million in several years time aiming only for 2 pips a day (TWO pips a day) and with 19 winers out of 20 (I simulated something like that for a FF member). 19 out of 20 it is large amount of wins but together (I believe) we can create a system which can give such RR.

This could be some kind of SRDC or even automatic EA - some kind of algorithmic trading.

But the rest will depend on you...

I'm just curious - why did you ask your question? Do you want to try such a project? It wil require a lot of discipline.

19 out of 20 means a system winning 95% of the time. That would be absolutely fantastic.

However, if you go for 2 pips only, you're going to get eaten up by the spread. So, you need to go for spread + 2 pips. In the case of the GBP/USD, this could be anywhere from 6 to 8 pips total per trade. Still not bad, but I also would want to ask you about your stops.

Theoretically you could risk quite a bit if you're winning 95% of the time. Let's just take a very simple case in which you win 19 times in a row and lose the 20th. Also, let's ignore the spread for now. You would have 38 pips in your pocket going into the 20th trade, so you could technically lose 37 pips and still be in the black. However, if you're going for 2 pips per day, in this example you've traded for an entire month and netted 1 pip.

If you bring the spread into the equation things change but just a bit. Let's use the EUR/USD as it typically has the lowest spread available - say 3 pips. I know you can find brokers who will give you a 2 pip spread but on average I'd say 3 is more common. So, each day you now need to make 5 pips in order to net 38 pips after 19 trades. You can now only lose 34 pips on the 20th trade to net the 1 pip for the month.

Where am I going with this? You traded 20 times paying 3 pips each time or 60 pips to your broker. You made 1 pip for the month. Let's say you don't risk 34 pips - instead you risk a more conservative 10 pips. Your 20th trade is your loser and you stand now at a net of 28 pips for the month (38 from the prior 19 winners minus 10 on the losing 20th), but you still paid 60 pips to your broker! Your costs of doing business this way are extremely high.

Consider now that your 95% winning system is off by a small factor - 8%. Something happened that you didn't account for, a small oversight perhaps. I don't know - anything could happen. Now instead of a 95% system like you believe you are really trading with an 87% system. If you don't realize that your win percentage has changed, you're still going to be going for the 2 pips a day approach but you may be risking too much. In the above example of 20 total trades, we could assume 1 loss in the series with 95% accuracy. With 87% accuracy you will lose 2 or 3 times out of 20 trades. This could be awful.

Two losses of 10 pips will net you 18 pips for the month in the example above (less than 1 pip per day!). Three losses of 10 pips will net you only 8 pips for a month (less than 1/10 of a pip per day!). Either way, your costs of implemeting this system remain at 60 pips to your broker. If you have wider stops, you'll likely lose less trades but lose more per losing trade. If you tighten your stops, you will likely lose more trades but lose less per losing trade.

I know I made a few assumptions about your approach, but I think the concepts are clear. Going for small, incremental pip values is not only extremely expensive, it is like walking on a tightrope above lava. You need to have a very, very accurate and robust system. It needs to be good enough that it doesn't pop off too many losers too close to one another. An advantage of a more traditional trend-following system is that it can sustain many small losses in a row and still make a fortune by the large "home runs" that come along every so often. It slowly bleeds out but when the market makes a run a trend following system really brings home the bacon. I use the trend following approach for illustrative purposes only, I am not saying this approach is better or worse, I am just pointing out the counterpoints.

You're doing the opposite of trend following. You're slowly reeling in the small pips and hoping that a market turn doesn't take you to the bottom. Not only can you not afford to have a couple of losses in a row, you cannot have losses even close to one another. If you lose 10 pips, you need to have six winning days in a row netting 2 pips per trade (5 pips with spread) before you can have another loss - otherwise you're going underwater and slowly drowning. This seems like treading water with cement shoes.

For all my negative points I addressed here, I do wish you all the good fortune in the world. I am not saying it cannot be done, I'm saying that you need to be 100% certain that your system really does deliver 95% accuracy if you're going to trade this thinly with it (i.e. going for small pip profits).

Personally, if I had 95% accuracy in picking price direction the last thing I'd do is cut my winners short. For instance, if you're correct 95% of the time that the market will go up, wouldn't you be able to tell with 95% accuracy that the move is over and the market will go down or sideways? Wouldn't a 95% winning system not only be able to identify entries AND exits with the same accuracy? If you can only identify the entries and not the exits, you're probably not trading a 95% accurate system. You're probably getting lucky on noisy moves. But that's just my intuition and opinion, again I'm not saying you have a junk system - my brain is just not wired to operate such a method.

Thanks for reading - your comments and questions are more than welcome.

-=DAVE=-

p.s. for those wondering, a 95% accurate entry coupled with 95% accurate exit makes for a 90.25% overall system. Still more than enough to make a mint even with lax money management.

dave, man change your avatar... we don't want people getting the wrong impression of what it is to blow your account [ which btw is probably what would happen following the posts on this thread ]

For what it is worth.

I believe that trying to figure how many pips you need to make a day to earn 1% per day is a backward approach to FX.

The trader who is profitable first considers how many pips a day he is most likely to win based on his trading style and proven past win/loss ratio. From that average number of pips a day you would then calculate how much percentage increase you would be earning.

I think it is best to figure out FIRST how many pips you can consistently win per day rather than focusing on a paper(xls) dream. After that I would set my benchmarks for percentage increase of my account.

In reality 1% a day is very, very high.

I'll be extremely happy when I can consistently make 1% a week. I was in good shape today but had to leave and apparantly my stops were not sufficient, and my trades weren't as good as I hoped. But hey it's only my first week.

but I think is it better even just to figure out first how to trade and not even concentrate on the pips. Just concentrate on having nice winners and not too many losers first Then the pips fall into place. After that the appropriate MM is apparent too.

The catch is in this statement I think "... 1. we reach our goal of 20 pips per day every day...." and possibly a factor you have left out, see below.

20 pips a day is eminently possible of course except when your balance reaches a level that exceeds your brokers lot limits. I think FXCM has a "20 lot per trade" limit without special arrangements ( of which I know nothing ).

At FXCM then, the A/c balance limit would be $400,000 at 20 lots max and 20 pips per day. This is a limiting factor not shown in your xls sheets.

Your xls sheet would max out at L30. See your xls and the lot calculator I made in sheet two. Nothing like your projected values, but still very profitable if you can manage it.

Good eye. When you max out at a retail chop-shop, er...broker, you can always go to an ECN or a real exchange like the CME.

it is,... imagine that in 10 years, a 0.1% difference a day is a 1 digit more to equity...

as the target, i give up targeting xxx% / timeframe
it stressed me a lot. trying a 0.3% a trading day for 261 day a year is already gives 30% Draw down because of overtrade....

Gwan, I've watched you from a distance for quite some time and feel I have to tell you this.

When I first started reading your posts they seemed to be based on your 100% conviction.
Then, they swayed to listening to Others opinions.
Now, is the time for you to believe Your Analysis is Correct.
And, If it is Not Correct, figure out why before switching to someone elses system just because you feel yours isn't perfect yet.

It is very possible. The problem is not getting the series of winning days. I decent trader will achieve that goal pretty much most day. Some less some more. Doesn't matter overall. Remember you are doing a series of trades a day so the overall daily outcome is important not that every trade is a winner.

What will stop you is liquidity. That's why compounding will not make you a billionaire just like that.

But i think it is obvious that one can not keep going at that rate forever, im talking about compounding at that rate as the account grows to bigger numbers. But there are ways around that, but even that, after a while, that will have its limitations as well. One way is to just have another account at a different broker, and just copy your trades, so now, instead of max out one, you also have a position with another account, and your money can continue at that pace, now obviously, you can go to broker number 3 when you max the second one too, but we only have 2 hands and 2 eyes, lol, well, some of us fortunate ones anyways. So at some point, the rate of growth will slow, but by that time, im sure that will not be the focus anymore, there should be plenty of money to play with by that time. If one doesnt get bored of trading that is.

As regards the possibility, yes but as to whether it is doable, well that's another question altogether..think you wanted to know if this is doable?
personally, do not think it is possible to target X pips daily..but let me know if you do have a strategy that makes this work.

You cannot do this with any of the for fun MT brokers. All the others tap into the same LPs / exchanges at some point so spreading over multiple brokers will not help anymore. But yes you better start trading and getting your daily consistency in instead of dreaming of the numbers. But yes it is very much doable. The usual dustbin traders show it. Don't concern yourself with the end of your excel sheet. Concern yourself with the top and getting the daily pips in while adhering to a simple strict MM on every trade. Compounding is an automatic process that you don't need to be concerned about at all while trading. It is a side effect of correct MM.