The 10 pips challenge

Hi all!

This thread is a combination of my blog and additional material I've written after closing the blog. Unfortunately the blog didn't receive a lot of attention, however I wanted the information to be seen so here I am. A lot of people on FF have helped me, willingly or not, but they've written posts that I've found most useful. Shouts go out to hanover, Paulus, xxTrizzlexx, medici, Islander, Vantage, grkfx, CrucialPoint, The Fool, smikester, CindyXXX, DarkStar, Fudomyo and many others. There are so many of you that I can't even remember all of you! This thread is an attempt at bringing some of the information back into daylight as a lot of tends to be buried under piles and piles of arguments and useless posts. Some of the information is new, some is old, you'll see for yourself.

In the following days and weeks I will be posting stuff that was once on my blog (don't try to look it up, it's closed now). I will also be posting a few updates on how I'm doing but mostly this thread will be about providing information and a place for me to think out loud.

10 pips a day? Challenge accepted! (published July 10, 2013)

A few days ago I was listening to The Trader's Podcast and Rob Booker discussed writing and publishing trading books. During the show, he mentioned his '10 pips' e-book*, which has had enormous success over the years. Why? Well, it's because the book is really simple, it only has one idea - the idea is that if you've failed at what you're doing with whatever you've doing so far, why not go for just 10 pips? So I went ahead and downloaded the book, read it and an idea popped in my head. I too could do it. I owed it to myself to at least give it a try. If whatever I've been doing has yielded nothing up to this point, what could possibly be the harm in trying to make 10 pips a day? Not a 100, not 50 or even 15; just 10. I mean, it's more than I've ever made. And it's less than 10% of the average daily range in any major currency pair.

I decided to challenge myself, to try to make just 10 pips a day trading currencies. I thought it would be fun to make my journey available online so people can read about it and perhaps even join me. I feel that this is something that I need right now - I need to slow down from trying to make a killing every day. And I need some accountability, something to prompt me to organize and store my thought for my own sake. Perhaps it will be of use to others as well and that's the reason behind making this journal of my progress and thoughts along the way public.

I'm going to start out demo trading a system or two just to make sure I'm comfortable with whatever I'm going to be using on a live account. For once, I want to do this right. This begins with demo trading and putting in place some solid money management rules to keep me out of sticky situations. I don't want fear and greed to govern my trading and I feel that doing a bit of simulated trading will help me get the feel of this is going to play out. Once I've decided upon a strategy that I feel comfortable with I'm going to go live.

*If you haven't read Rob's '10 pips' e-book you can download your copy on his website,here's the link.
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I've added the date of publication in case of previous blog posts. Please consider that when reading these posts. For example, I've already decided upon a strategy and I've demoed it enough to know it works for me. I will post an update once I'm finished with posting old blog posts.

Why 10 pips? (published July 13, 2013)

What is it about 10 pips? Why not aim for 50 pips like that well-known Twitter user does? Or why not, at the very least, 25 pips? That would be 2.5 times better than making 10 pips, right? And through the use of compound interest, perhaps even 25 times better?

Here's why:

1. Easier. I'm better at pulling 10 from the market than 20, 30 or 50 (I've looked at the statistics from my trade history). I'm sure it's the same for you. Once you've achieved consistency and success with 10, you can either increase your account size or increase your target.

2. A lot of opportunities. With 50 pips as the goal, once you've missed the trade, you're most likely out for the day. With price movements around 100-150 pips a day and swings anywhere from 5 to 35 pips you can be sure to be presented with multiple opportunities for a 10 pip entry. This not only means more opportunities to enter once you've missed the first move of the day, but also more opportunities to break even for the day once you've had a losing first trade. Of course, one needs to avoid overtrading, but that's a topic for another day.

3. Strategy independent meaning that you can fit most technical strategies you can come up with to capture 10 pips without having to tweak it too much. It can be a moving average crossover, a retracement, a supply/demand level, you name it. With goals closer to a third or even more of a pair's average daily range you'll need a really good strategy with very precise, and all the while, robust, entry criteria. With a goal as low as 10 pips you can afford to be less choosy as far as the entry/exit strategy goes.

4. Less stress. It builds up a habit of looking at the market from a more relaxed point of view. As I mentioned before, most pairs move around 100-150 pips a day. A smaller goal allows you to relax and wait for just the right conditions for your entry instead of blindly gunning for it and ending up an emotional wreck after the one and only trade of the day blows up in your face.

It all depends on how much SL you put in.
If you take 5 pips for SL, 1 is not the case.
But if you take 100 pips for SL, 2 and 4 are not the case.

10 pips surely sound easy to get. But I respectfully disagree. It is as hard as to get 50, 100, 200 pips. Again, it all depends on the SL you set.

I guess it depends on what pair you are trading. If you trade a pair without volatility, you will have a long day.

You still need to know the direction of the market though. I guess that is why forexgogo is talking about a stop loss? So you can just blindly enter and hold the position until it is profitable? Kinda stupid, but then I don't use stop losses, so what do I know? I am a range trader, so I make a whole lot more money than most people because they are taught to trade trends, lol. I don't need a stop loss because I know what to do almost all the time. Also, my trading system is not for sale, nor for public knowledge, and because it actually makes money I don't have to write a book on theory, LOL, and settle for 10 pips a day.

Again, it depends on the volatility of the pair and which direction the big money is moving the market. I have not traded a major currency pair for probably a year or more since they all decided to go flat, but I would assume you can just trade a 12 period stochastics signal and make 10 pips fairly easily. Again, I am not sure because I stopped trading majors quite a while ago. They stopped making me money with all their low volatility. You might have to make 3-4 trades to get 10 pips profit after spread, lol. Okay, to be fair I just looked at the 5M chart of the EUR/USD for 27 Dec 2013 and the first trade at London open was worth about 26 pips profit in 55 minutes. Then it went flat for a little over 2 hours and then popped another 53 pips profit or so...depending on your spread. It looks like some of the candles in the consolidation zone would have done 10 pips for you too. So, there ya go.

I remember reading something years ago that if you make 20 pips a day it is worth $50k a year. I am not sure the lot size though. It might be 1?? Anyway, 10 pips is definitely pocket change, but could be a car payment for some people. Better to learn how to actually trade, but I know 99.9999% of people have no idea, don't want to do the work to learn, and can't make money even when you tell them exactly what to do. It's hilarious actually. I don't expect to show up at your job and know how to do it as good or better than you, but everyone thinks they can trade against people like me. It's almost sad. In truth I tell myself I am taking the money from the banks, and not the people, but I know people are losing too. Not all of them though. You can tell when someone is full of sh*t because they will tell you 90% or 95% of people lose. That isn't true. A marketer tells you that to convince you to look at his crap. A trader has a broker who is required to report the win/loss ratio quarterly. At my brokerage about 73% of traders have more loss than gain on average. Doesn't that make more sense?

I guess you can target $50k a year, but I prefer making it daily. Does 10 pips mean $25K? If you really suck at trading, then it is a good goal. The less exposure you have in the market, the less chance you will give your money to someone like me, or a bank.

Good Luck If I can attach a chart, you can have a look at what you are up against. It isn't pretty...for you. Don't bring a knife to a gunfight

Forexgogo, I agree with most of what you wrote. But let me just clarify what I meant to say earlier. First of all, I chose to go with the 10 pips strategy because I had been unable to make money on a consistent basis until I decided to use the strategy 10. I like trading short term charts and 10 pips is achievable and there are a lot of opportunities if you have a strategy in place. Now, of course, using a stop loss is a must. For me, I chose to put the stop loss near a swing high/low or very near the trade entry point. Basically what I did is I put the stop loss (in most cases) behind the candle high/low of the candle preceding the signal candle. Usually this would be around 8-15 pips. Just to be clear about this, I usually go for 10 pips, but if I do see an opportunity to make more, I use two trades with same lot sizes - one to catch 10 pips and the other to ride the swing. There are opportunities to be had on higher timeframes that could net as much as 50, 100 or even 200 pips but that's not what I'm interested in at the moment. I have a few strategies in the trunk that could be used to trade higher TFs, but I just don't have the time for it.

dkrock, I see what you did there.
Basically you're filtering out the low volatility and not trading during that time. That's smart. I've written about that myself as well and I'm going to post that piece real soon. Good luck!

Could you post a chart that shows your "10-pip strategy"?

hi all

i do more than 10 pips, but my system will work for 10 pips a day

I'm not interested in sharing my system, because there's really nothing new for me to offer to you or anyone else reading this thread. The simple truth is that you will most likely not find a system developed by someone else (to match their personality, market knowledge, money management preferences etc.) that you will be able to make your own. I've tried using other people's systems but in the end you still wind up tweaking it. It's much easier and less time consuming to start with a black page and work your way up. Tweaking existing systems to suit your needs might work, but I prefer a black page.

The best thing to do is to ask yourself 'what am I good at?' and 'what am I bad at?' and go from there (for example, if you're good at short TFs and GBPUSD, concentrate your efforts there, don't spread your focus).
Next up you'll probably want something to
(a) help to tell the direction and strength of a trend (if there is one)
(b) something to trigger your entries
(c) something to help you place stop losses and also something to help to determine when/where to exit. You go from there.

For some, it could be
(a) slow moving average
(b) price breaking the 123 pattern
(c) recent high/low

Of course, the above is just an example.

Stay in the game (published July 16, 2013)

Lehman Brothers, AIG, Bear Stearns, Jerome Kerviel, Nick Leeson and MBAC. Every one of these companies and individuals got into financial trouble because they had lost touch with reality. It doesn't matter what financial instruments they bought or sold, they all got into trouble because they had too money going on the same trade - they were overleveraged.

This means you have to decrease your trade size to a point where you can afford to lose, several times in a row, with your financial and mental balance intact. Reduce your lot size until you can cope with the losses. You don't want to end up in a situation where you can only focus on 'getting the money back' as it will likely lead to overtrading, inability to think straight, inability to follow your own rules (the ones that are based on past mistakes that you swore you were never going to make again) and a loss of capital to trade with.

The only way to make any real money is to stay in the game long enough for compound growth to take effect. - Rob Booker in Trader's Podcast episode 9

How to change bad trading habits (published July 24, 2013)

Habits govern your life from the time you get up in the morning until you hit the sack in the evening. You eat the same kinds of breakfast, drink the same beverages, watch the same old shows you're used to watching, socialize with the same circle of friends and relatives. So it's not surprising that your habits also govern the way you trade.

Habits can be good and bad for you. Brushing teeth in the morning and the evening is a good habit, while eating junk food can lead to some serious health conditions. So it is with trading. Setting a stop loss is a good habit, not setting a stop loss and letting a loser cripple your account is an awful habit. A lot of times traders know they're doing something wrong, but when they try to change their ways something happens. They have all the good intentions, all the rules written down to avoid doing the wrong thing, but ironically they end up making the same mistakes they were trying to avoid. You can blame your habits for that, because once they've had time to form, habits have enormous power over your actions.

Why habits have so much control
Daniel Kahneman, in the brilliant book Thinking, Fast and Slow, writes about two 'systems' that are in charge of running our brain. System 1 is in charge of fast, intuitive thinking (think automatic responses), system 2 takes care of slow, deliberate thinking (think doing your taxes or preparing for an exam). When dealing with a new situation, system 2 kicks in and does the intense, energy-expensive thinking, forming a pattern for future responses to the same type of situation. As soon as we've had enough exposure to the situation, system 1 takes over and the whole decision process disappears from our conscious mind into the deep that is our unconscious. It's good that we don't have to consciously think about our habits as long as they benefit us. You don't normally think about having to break when you see an obstruction on the road, you just brake because you've had repeated exposure to the same type of situation which has prompted your system 1 to develop an unconscious response. As soon as you see a stroller on the road your system 1 rapidly retrieves the 'file' that sends a command to hit the brakes. Habits like this help you automate what you do without having to consciously think about it so your mental faculties are left ready to process new, important information.

Habits can also be damaging for the very same reason. When you're in a losing trade, system 1 is already loading up the mental file that tells you to let the loser ride out, since it's going to be a winner anyway. It also tells you not to place a stop loss, or, place it and then move it once price gets too 'close'. Having a stop loss, seeing it taken out and seeing the price reverse right after, ever seen that? How about enough times for your brain to decide that this is usual enough to write a mental file and store it in system 1 for fast retrieval whenever you're trading, telling you not to place a stop loss? This is crazy because the market can do whatever it wants, it doesn't care about your stop loss, but you do it anyway, because you've habituated yourself into doing it.

Habits are physically present in our brains
Scientists know that habits are physically stored in our brains, the thought patterns have quite literally formed nerve pathways that become stronger every time they fire. As Nicholas Carr writes in The Shallows:
Since system 1 is in charge of your habits, you don't have to think about how you manage your trade for the habit to have its way. Every time you take a trade system 1 already has all trade management 'advice' laid out. What do you think system 1 is going to do? It's going to give you the same answer as it did before, it will tell you to close out your winning trades, but it will also keep you in losing trades for as long as you can withstand the pain. You can change your habits, but without effort, without deciding to do what's difficult it will be impossible to override the suggestions system 1 throws at you.
The good news is that good habits, just as bad habits, can be formed through repeat practice. Before anything else, I want to get one myth out of the way. In his book Making Habits, Breaking Habits, Jeremy Dean refutes the widespread myth that it takes just 21 days to change a habit. The truth is that it depends on the habit, some habits are easier to change while others require more commitment. It might take as long as 60 days for some of the tougher ones, but it's still doable and will be worth it, because once you've formed new habits, you won't have to think about them as autopilot takes over. The same automated process that is giving you such a hard time right now will, after putting in the necessary effort, be benefiting you.

Since habits are unconscious, the first action you must take is to bring your conscious, deliberate thought back into the picture. This means actively thinking about the decisions you are making while you are trading so that you will activate the right neural pathways. If you don't start focusing and making conscious, deliberate decisions, your automated processes (habits) will keep running the show. The same thing can be said about overeating or exercising - once you are set in your ways, the only way to break out of the cycle and start forming new habits is to override the automatic processes by activating deliberate thought processes.

Steps to change habits
1. Map your current habits, good and bad
2. List the habits new habits you want to acquire
3. Think about the specifics (examples: something to help you determine the best place to place a stop loss; number of trades you're allowed to take in a day)
4. Get motivated. Use the SMART criteria (more about that below)
5. Start small - work your way up from the easiest to the most difficult habits
6. Forgive yourself for the slippages and move on
7. Review your progress once a week

Before you take on any difficult challenges, try to find a few habits that are easier to change. Research has shown that once having changed an easy habit, people find it easier to take on the next challenge. Go for the long-hanging fruit first.

Motivation is important
It is important to remember that thinking things through and setting proper goals are an important part of the journey. From Making Habits, Breaking Habits:
Go ahead and grab a piece of paper. Use the SMART criteria. Map your goals, get motivated and make a schedule. Remember to review your progress once a week as it will help you see how you're doing. You will definitely have moments of weakness. We all have our moments of weakness, but don't beat yourself up for it - research has shown that a few slippages aren't enough to undo everything, missing a day is fine as long as you forgive yourself and keep on moving forward. Building new nerve pathways takes time, slipping once or twice is not going to undo the work you've done laying out the new pathways unless you give up. Studies have shown that people who can forgive themselves for slipping up (for example: eating a piece of chocolate cake while on diet) were more successful in forming new habits. So if you ever find yourself wondering whether you should continue or just give up, stop thinking and just do it, keep on moving forward.

Hi Bug
I am not an active member but do search and read certain FF members' posts. I was pleased to find your new thread. Although I doubt I will post much, but like many others I will silently follow.
I would be particularly interested in your money management thoughts. If my math is correct, mm is much more important than one's typical trading system.
Thanks for sharing. You have the ability to explain ideas very clearly: a feat not found on many threads.
thanks again
gmmc

i agree. 10 pips a day sounds easy, yes. In reality it is way harder than it looks. It depends on your SL target, a 5 pip SL depending on time of the day you trade is nothing but a tick away from getting you stopped out plus on top of the spread you paid to enter the trade. Obviously any SL higher than 5 pips pretty much reduces your R/R, anything less than 1:1 is asking for disaster.

Hi bud, you will not get anywhere demo trading. 10 pip trading theory is good. Something the big boys do called easy money/beer money look at the hourly- daily time frame and it stares at you right in the face and this 10 pip is easily achievable (often 20 pips). You now have to think how to trade it, good luck and I am sure you will crack it

I totally second.

Trying to get exactly 10 pips everyday and thats all will ruin you. First nothing in fx is consistent. You are better trying to AVERAGE 10 pips so this might mean you pull a trade that is 300 pips or 250 pips but say if you averaged your profit from one year over what it looks like in a day it would be 10 pips.
GOOD LUCK!

gmcc
Thank you for the kind words. In terms of the importance of MM, I agree with you. Risk of ruin is something to consider whatever system one is using. I will post about MM soon. At the moment I'm posting old articles from my blog, but after I'm done I'm open to all questions.

Not if your win percentage is high enough to justify it. The system that I'm using takes advantage of illiquidity by betting on the price returning to levels with higher liquidity. Some would say it's divergence trading, but it's a bit more than that. Basically what I'm doing is taking advantage of exaggerated price moves, usually on the 5 or 15 minute chart. Those moves are usually quite fast and often run out of steam after about 12-14 pips (sometimes it's 20 pips or more, but I'm not concerned with squeezing the maximum out of each trade).

I think I know what you mean with that, but as I said before, some of these posts are 6 months old and a lot has changed since then. The reason I demo-traded was to rid myself of bad trading habits and to enforce new, good trading habits. If you look at the post about habits you will see what I mean. I agree that demoing is not the same as trading with a real account and I'm not trying to argue otherwise. I didn't use demo trading to 'get a feel of the market' or what not, I used it to habituate myself with correct trading behavior and I'm glad to report that it helped.

Well congratulations for making a blanket statement. With the win percentage of my system this is not an issue. I don't really understand why you're all concerned with the headline of this thread, the content I've posted here is about much more than that. Just pull out a spreadsheet and calculate the returns of 10 pips goal vs average 15 pips stop loss with a win percentage around 80-90% (depending on the month). I'm not trying to be hostile or to suffocate the discussion regarding 10 pips, it's just that I don't see that as something that important. The reason I focused on 10 pips in the first place was because my previous attempts at setting discretionary goals or following trends on low timeframes had failed. If you start off with a specific target in mind (10 pips or 20 pips for example) for a low TF it's much easier to build a system around it (see above). In any case, focusing on a specific return helped me a lot, but I'm not going to entertain this train of thought anymore. Let's focus on other stuff.

PS. I would also like to add that there are cases where I take a position with a smaller size but with a bigger target/SL. This usually happens on a 15 minute chart during times of high volatility.

{quote} Not if your win percentage is high enough to justify it. The system that I'm using takes advantage of illiquidity by betting on the price returning to levels with higher liquidity. Some would say it's divergence trading, but it's a bit more than that. Basically what I'm doing is taking advantage of exaggerated price moves, usually on the 5 or 15 minute chart. Those moves are usually quite fast and often run out of steam after about 12-14 pips (sometimes it's 20 pips or more, but I'm not concerned with squeezing the maximum out of each trade). {quote}

Having an high win percentage is not be all, and my opinion the most over-rated statistic when comes to trading. An trader with an 40% win percent can easily be more profitable than an trader that is 70-80% mainly because of the quality of there trades. Yes it looks fancy and good when you are winning a good chunk of your trades and in life we are not taught to lose majority of the time and still come on top so that is a shell shocker to many people who decides to trade any markets.

BUG, accept my apologies. A few people can use demo correctly (without bias) and keep level headed. Its like the poker sites using pretend money.£30000 real money is a lot harder to trade than £1000000 demo. Having said that if you have a good method trading the £30000 is the same as £3000 or £300. keep to the plan and yes ADRENALIN does kick in, you ought to of seen me when I traded lol.
Some of your viewers here seem to think you are going straight for 10 pips lol, if you have to explain to them what you are doing I don't think they ought to be trading.
Good trading in 2014 and I am sure you will crack it

I've been in the trading game long enough to know that if you increase your win percentage you tend to decrease your win size, at least if you're going to stay profitable. Believe me, I've read enough posts and done enough trading to see the math play out in front of my eyes. I'll just leave this topic be and post you my live trading updates next year. That sound fair to you?

Don't sweat it, man! No need to apologize. Adrenalin does kick in as you said. So does cortisol and the rest of them (I would advise everyone to read John Coates' excellent book The hour between dog and wolf for more insight on that topic).

Anyways, I will be posting updates next year as soon as I'm done with the exams in the uni. In the meanwhile, I hope you all have a grand new year's eve! Work hard, play hard! See you next year!