I remember when I started my journey into becoming a profitable trader that one of the first things people showed me was how you could become a millionaire pretty quickly – from a couple hundred bucks – if you could just make X pips everyday. Other people had very compelling arguments for this idea, telling me that the market moves thousands of pips each week and therefore – if you knew how to trade – capturing these small profits should be no problem at all. After this idea a lot of people started to post in forums and publish articles in blogs attempting to capture the essence of this concept. Many threads with names like “2% each day” or “100 pips everyday” started to come up in forums and a whole group of traders started to tackle the market in an X profit per day of week style. After acquiring a lot of experience and having become a profitable trader myself I can say that not only is this concept of “constant profit” flawed by design but the mindset in which it puts a traders is terribly dangerous and only increases the chances of failure. Within the next few paragraphs I will talk about why fixed profit targets in forex are a very BAD idea and how you should view profitability if you wish to have a better chance and truly achieving success.
Certainly the idea doesn’t sound crazy or bad when you first think about it. You go into trading, make a few pips, stop and repeat, everyday. The EUR/USD tends to move at least 50-100 pips everyday so capturing a net movement of just 20 or a few small trades to achieve this profit level shouldn’t be hard. However this idea has some general assumptions that make it flawed and its application in real live trading for any significant amount of time, practically impossible. As a matter of fact – although I cannot prove that such a trading scheme is not possible – I can tell you that I do not know a single profitable trader who has been profitable for at least 2 years who has made his or her money trading this way. So even though the possibility of this being possible exists, the probability of this happening seems extremely low and – since no one seems to have achieved it yet – highly unlikely.
Why is it so hard to achieve this seemingly so easy target ? Why can’t a person get into the market and take 10 pips everyday ? The answer lies in another fatal assumption of this idea which considers that under all market conditions inefficiencies can be found. Even though the market may be inefficient under some very special market conditions – as in strongly trending markets for example – not all market conditions are equally inefficient and certain market conditions – especially illiquid times or uncertain periods- tend to be more efficient as there is no real “crowd behavior” but price is merely the result of seemingly uncorrelated individual decisions (which are very unpredictable).
The problem with attempting to grab a certain amount of profit everyday is simply that the market may not be “willing” to give that money away everyday. Attempting to “push the market” into giving some money under circumstances where there is no statistical edge in favor of the trader is a recipe for disaster as eventually a set of market conditions come when the trader has no edge and losses a lot of money. Traders need to work with the market as the market allows, not attempting to get into the market everyday regardless of how market conditions work. Another problem is that aiming for a “fixed profit per day/week/month” inherently means that you will lose profit when the market would be willing to give you more and taking loses when you should not be trading.
Psychological pressure also becomes an extremely important factor when traders decide to go this way as the pressure to make money increases as losses are taken since the “target level” is being missed. Some people then suggest new traders that the idea is to make “x pips everyday on average” but that some losing days are OK. However this assertion is just as destructive as the trader is conscious of this average and an ever growing pressure is laid on top of the trader to achieve a certain profitability level. In the end everybody I know who has tried to trade this way has eventually failed due to the psychological stress that the “profit per time unit” concept demands, couple this with the fact that traders who try this generally do not have any idea about whether or not the techniques they use actually have a statistical edge and you will get a recipe for disaster.
The idea of trading with a fixed profit is – in my experience – a terribly flawed one since it does not acknowledge the variable nature of the market and the psychological pressure it places on traders. My advice for anyone wanting to succeed in trading is not to attempt to make a fixed profit target every day/week/month/year but to come up with strategies they can evaluate in the long term to see what profit the market may be willing to give for certain trading techniques. It is unrealistic to believe that a certain profit can be achieved if there is no evidence about a statistical edge or the actual risk taken in the long term with a given strategy, the best solution is therefore to get an in-depth understanding of the risk and profit characteristics of a strategy in the long term (5-10 years or more) and work on that without making any unrealistic assumptions about the market which have no actual support in real evidence.
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