There is a lot of talk in the world of Forex, and has been for some time, about the 10 pips a day strategy. It’s a strategy that claims to “make you rich quickly” by accumulating just 10 pips each day. Well, I’m here to tell you that not only will it not make you rich, it will likely blow your trading account if you give it enough time.
The lure of the strategy is the perception that making 10 pips a day can accumulate into great fortunes in a relatively short period of time. Because, as those who promote the strategy will tell you, it’s easy make this amount each and every day.
But 10 pips a day should be easy, right?
In theory, yes. But as we all know, becoming consistently profitable in the world of Forex isn’t a theoretical endeavor, it’s a practical one.
In this article we’re going to take a look at the controversial topic of making just 10 pips a day and why it doesn’t work. As a result, you will learn a way to set performance targets that account for gains as well as the risk taken to make those gains.
But first, let’s discuss this 10 pips a day strategy in greater detail.
The idea behind the strategy is to aim for quick wins every day. As the name implies, the goal is to make a profit of 10 pips each day.
This sounds simple enough, and in theory it should be. But again, profiting from the Forex market isn’t theoretical.
Most of the strategies out there that aim for a small number of pips each day also carry with them a large stop loss. At least large in comparison to the nominal profit potential from each setup. This strategy is no exception.
This is vastly different from what we do, where we aim for a proper risk to reward ratio of at least 1:2. Most of the strategies that aim for 10 pips a day use a 90 pip stop loss or greater. I have even seen some as large as 180 pips; to achieve just 10 pips of profit.
In essence they use the complete opposite approach to risk to reward as we do here at Daily Price Action. They take on huge risk for little reward in exchange for a high win rate.
And therein lies the problem.
Many traders like the idea of strategies like this because they produce quick wins and promise high win rates. As we all know, it feels good to win. Think about how you felt after your last winning trade. Or better yet, a series of winning trades.
Feels good, doesn’t it? And why shouldn’t it?
There’s nothing wrong with feeling good after a winning trade. You put in the work to find a favorable setup which resulted in a profit. So there’s nothing wrong with a little pat on the back for a job well done.
However there is something wrong when you choose a strategy simply because it induces a winning feeling more often than not. Or at least that’s the intent of the strategy.
You see, becoming a successful Forex trader isn’t about winning, it’s about becoming consistently profitable. There’s a big difference between the two.
It isn’t about feeling good when you win more often than feeling bad when you lose. It isn’t about feelings, period.
When you choose a trading strategy based on win rate, you’re letting your ego do the decision-making for you. Your ego wants a strategy that’s going to give you that nice “winning” feeling.
The logical side of your brain wants a trading strategy that will grow your trading account. It’s also the logical side of your brain that knows it takes a great deal of time and practice to become consistently profitable.
Your ego wants the profits now and doesn’t care how much you have to risk to get it.
Before we talk about why the 10 pips a day strategy is disastrous, I want to clarify two things:
Now let’s get into why a strategy like this is dangerous.
Unfavorable Risk to Reward Ratio
The basis of a strategy like the “10 pips a day” strategy is a high win rate. This involves risking a large amount of pips for a relatively small gain.
Let’s use the 10 pip take profit, 90 pip stop loss strategy as an example.
In order to break even with this strategy, you would have to win 90% of the time. That means out of 100 trades, you would need 90 of them to turn a profit.
That’s an unrealistically high win rate for any Forex trading strategy. And that’s just to break even. If you want to actually profit consistently you would need to win more than 90% of the time.
Think about it this way. You have two consecutive winning weeks, making your goal of 10 pips each day. So for ten days of trading, you have made 100 pips. At the end of those ten days you feel unstoppable.
On the eleventh day, disaster strikes. Your stop loss is hit for a 90 pip loss. So after eleven days of trading, you have 10 pips of profit. Demoralized and frustrated, you set out in search of a new strategy that’s going to make you millions.
This is the vicious cycle most Forex traders live in, and it’s why using an unfavorable risk to reward ratio can be hazardous to your career as a Forex trader.
The unfavorable risk to reward ratio brings us to the next reason why the 10 pips a day strategy is dangerous – unrealistic expectations.
Any trading strategy that uses a fixed number of pips within a specified period of time as a goal is a disaster waiting to happen. You can quote me on that.
The market moves on its own schedule. Every week is unique, just as every day, hour and minute is unique. A currency pair won’t give you the exact same type of movement from day to day or week to week.
So why expect the same amount of profit each and every day? It just doesn’t make sense.
The market isn’t on your schedule. To become a consistently profitable Forex trader you have to learn to take what the market gives you. That might mean not trading for a day or even a week.
To say that a market is going to move in a way that will produce 10 pips of profit each and every day is completely unrealistic.
Although price action trading is my preferred method of trading and has been for many years, I’m not going to pitch it as the solution. Instead I’m going to show you how to set performance targets that are both achievable and also account for risk. This can be used for any trading strategy out there.
In order to do this, you will need to use two metrics to track your performance. The first metric should be your percentage gain. This will be the amount you aim for each month. I recommend starting off somewhere between five to ten percent profit per month.
This is a realistic expectation and has real value. You know exactly how much five to ten percent profit per month would equal based on your account size. If you simply aim for 400 pips per month, for example, who knows how much each pip is worth. It could be $1 or $10. By using a percentage gain you are establishing a performance target with real value.
The second metric needs to account for risk. After all, five to ten percent profit is great, but if you’re risking twenty percent to get there, that isn’t so great.
For this metric you’re going to use an R-multiple. What is that, you ask? You simple take your profit target in pips and divide it by your stop loss in pips. For example a 300 pip target with a 100 pip stop loss would be 3R.
Therefore the goal for your second metric would be to maintain an average 2R minimum for the month. This forces you to look for favorable trade setups where the potential reward is at least twice the risk.
There you have it. Instead of aiming for an arbitrary number of pips per month, you aim for five to ten percent per month while maintaining an average 2R minimum. You now have a goal that’s going to produce gains while accounting for the risk taken to make those gains.
That’s what it takes to become a consistently profitable Forex trader.
At the end of the day, strategies like the “10 pips a day” Forex strategy aren’t the problem. At least not the root of the problem.
The problem is the idea that profits from the Forex market can be put on a set schedule. Whether it’s 10 pips, 20 pips or 30 pips a day. The market doesn’t care, nor will it move in a way that will produce those kind of gains for you each and every day.
The other problem is risking nine times the potential reward. Becoming consistently profitable is all about putting yourself in favorable positions to make money. A trade setup where a loss is nine times greater than the potential reward is the opposite of favorable.
You may say this is all just my opinion. And you would be correct. But when was the last time you heard a professional Forex trader say they were done for the day because they hit their 10 pip goal?
Do you think George Soros or Bill Lipschutz trade Forex in this manner? Of course not. In fact here is a quote from Bill Lipschutz himself.
For the longer-term trades, especially when multiple leg option structures are involved and some capital may have to be employed, I look for a profit to loss ratio of at least five to one.
This article wasn’t written to insinuate that the only way to profit from the Forex market is by using a 2R minimum on each trade. Or that price action is the only viable trading strategy. As we all know, that simply isn’t true.
This article does, however, bring to light the idea that risking 90 pips to make 10 and expecting the market to give you those 10 pips in profit more than 90% of the time is unrealistic. Dare I say impossible?
Have you tried something similar to the 10 pips a day Forex strategy? Do you think the approach to setting performance targets discussed in this article will be helpful in your trading?
Share your experience or ask a question in the comments section below.