Managing Expectations: Earning Potential

What can I reasonably expect to make from trading? That is a question in the minds of many who just start out in FX.

Naturally, having heard of fantastic stories from other traders and marketing hype from brokers, signal providers, various 'autopilot' vendors... many are enticed by the prospect of perhaps doubling their trading accounts on a regular basis, perhaps doubling it one a monthly basis or even daily for that matter. I believe that there are many that in fact who do possess the capacity and capability of doing this... but here's my own take on the subject.

Profitability and sustainable success is contingent upon two things. A 'good' trading strategy and a sound money management approach. It may sound 'weird' to some, but the fact is the best traders also happen to be the best money managers. To those in the know, this fact is far from being 'weird'... for it actually makes sense if you really put an effort to think about it.

Different people employ different trading strategies and it's therefore hardly surprising also... that they employ different money management approaches. How then, given my own trading strategy do I approach the subject of money management?

Well, first I set my daily at risk value... how much I'm willing to risk on a daily basis. Presently, I find that the acceptable daily at risk (for me) is 3%, meaning I'm willing to risk 3% of my equity daily in the quest for returns. If ever I should lose 3% in a day, I simply walk away from the trading screens and come back the next day.

I further divide the 3% into 10 trades, thereby putting my risk per trade at 0.3%... thus allowing me to make 10 losing trades in a row before reaching my daily risk mark.

On a USD10,000 trading account, this would mean risking USD300 daily and USD30 per trade. With a 30-pip SL, this means the pip value of per trade shall be USD1/pip (1 mini lot per trade).

Based on my trading strategy, typically the SL is frequently 20-40 pips and the reward:risk in most cases is greater than 2:1. For my calculations below, I shall assume an average 30-pip SL and an R:R of 2:1 (i.e. my losses will be 30-pips and my wins will be 60-pips).

Assuming one has a modest 50% (5 out of 10) win:loss record in a day:
1. W +60
2. L -30
3. W +60
4. L -30
5. L -30
6. W +60
7. W +60
8. L -30
9. W +60
10. L -30

Tally = 150 pips (USD150 at USD1/pip)

Compounding (adding profits to alter risk amount and therefore lot size per trade) aside, on 20 trading days a month one could earn USD3,000 (150 pips x 20 days x USD1 per pip). USD3,000 on USD10,000 is essentially a 30% monthly return on a modest 50% win:loss record.

No doubling of accounts on a monthly or even daily basis... but not bad eh? ;-)

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Fixed Ratio Money Management

It's been a while since I last blogged about Money Management, what many consider to be the most important yet overlooked subject in trading. As one of the three (3) pillars of trading success (the other two being Mind and Method), I therefore feel that I have an obligation to share more of my thoughts on the matter.

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