Hi, I'm Peter Rose, Founder of Longwood Currency Trading, and welcome to LCT Blog Post 12/30/21 — How To Pace Your FOREX Trading.
Pacing your trading should be a critical element of your trading plan.
For example, if your yearly profit target trading a $30,000 account is $6,000 (20%), then, on average, how many trades a day will you need to make to achieve this?
What data do you need in order to solve this problem? You'll need to know your Win To Loss Ratio, the bank size you will trade with, and you'll need to know what your average per trade profit is. [*** For more details on Win To Loss Ratio analysis, refer to my blog post Importance Of The Win To Loss Ratio Trading FOREX.]
In order to determine what those values are, you're going to need at least 100 valid trades as your sample size of data. Unfortunately, if you're either just starting in your trading journey, or you're trading is unsuccessful, then you won't have valid data.
That's why I always say that in order to determine any trading metrics, you'll need to have traded at least 300 times.
The first 100 don't count because you're just learning. The second 100 trades don't count either because it's during that period that you're just figuring out how to implement your trading plan and becoming somewhat consistent with your trading results.
It's only during those last 100 trades then that you'll have valid data, i.e. trading results, in order to determine your trading metrics.
So, let's say that you do have sufficient valid data of a Win To Loss Ratio of 60/40: Can you achieve your profit target goal of $6,000 against that $30,000 bank? The basic Win To Loss Ratio looks like this:
I want to make this analysis more generic than specific to just a 20% return against a $30,000 bank. If I translate the above W/L equation into mini lots at $1 per pip, it not only makes the math easier to work with, but the results are then easily translatable into full pip values.
$200 is 20% of a $1,000 bank to trade 1 mini account at $1 per pip. So, if I get done with all the calculations for this and end up with a 5 pip value for something, and need to translate that from a mini lot dollar value of $5 to trading a $30,000 account at $30 per pip, that 5 pip value then becomes a dollar value of $150. Simple.
So, let's take that mini lot version of the W/L equation, and assign values to the variables we know.
You'll note that I have arbitrarily set the NumberPipsLost value to 8 pips. This is consistent with all of the day trading examples that I use where I'm trading on a 5 minute chart with an ATR of 5 pips.
The 8 pips is obviously a 'short stop', but if you go through some calculations on your own using a consistent short stop value as the only thing you have control over, then figuring out what you need to do to achieve profit against that loss becomes much easier not only in theory, but in execution.
And so, the restated equation becomes the following:
Doing a little simple algebra gives us a NumberPipsWon value of 8.67; basically 9 pips. What that means is: as a 60/40 trader if the stop is kept consistently at 8 pips, then when you win, you need to win about 9 pips (or better) each time in order to achieve that 20% against bank.
Since that Win To Loss Ratio equation was based on $1 per pip to make $200, 20% profit, then trading 3 full lots at $30 per pip results in simply multiplying the $200 by $30 per pip, and you get the desired $6,000. Okay? Oooookay....
Well, so what?
Let's do another calculation. Using those same parameters, how many pips (i.e. NumberPipsWon) would you have to win each time you won in order to achieve a $15,000 profit against your $30,000 account size — a 50% vs 20% rate?
Since you're looking for that $15,000 translated into 1 mini lot: divide that by $30 per lot and you get $500, and so the equation now becomes the following:
Doing the algebra on that now gives a value of NumberPipsWon of 13.67; call it 14 pips. That means that now, instead of only needing to make 9 pips or better per winning trade, you'll have to make 14 pips: 5 pips, or 1.8 times more pips.
To do that will require you to dramatically accelerate the pace of your trading to achieve that higher NumberPipsWon value. This could very well damage the 60/40 Win To Loss Ratio that you have. This would most likely have the affect of increasing the NumberPipsWon value even more than 14 pips.
You groan, realizing that you just don't have the skill to make 14 pips when you win; that your current ability is simply 9 pips. But you still need to make $15,000 profit a year. Now what do you do?
Well, that's pretty straight forward to figure out. Assume you can make $6,000 against a $30,000 bank at 60/40. The question becomes: at 60/40 how big of an account would you need to make 20% against to equal $15,000? The reason you need to calculate this is to stay within your current ability trading pace....
So, given your current ability trading pace, you'd need to have a $75,000 bank, trading $75 per pip to make $15,000 as follows:
So, if you want a bigger profit target with the pace your ability puts you at, then as Roy Scheider said in the classic 1975 movie Jaws, "You're gonna need a bigger boat,": you'll need a bigger account.
And if you can't get that much money, then what?
Then, you either work to increase your skill by improving your Win To Loss Ratio, and your average per trade profit, or you take the risk of increasing the pace of your trading beyond your current ability level.
You simply can't risk pushing your current pace beyond your ability level. But, that's the route we all take the first time we start getting consistently profitable results.
This is an emotional response; not one you'd find in a trading plan. We start to think, "I got this...." But we really don't got anything except an ego falsely bloated from some random statistical series of winners rather than any particular skill we might have.
It is my personal feeling that everyone has their own particular trading pace that they are capable of achieving. For simplicity, let's just say that the Win To Loss Ratio is a good representation of that pace.
In the first couple of years, perhaps just a year, of your trading, you develop the skills to achieve some W/L, some pace to your methodology and execution of that methodology. Let's say that's 55/45. As you get better, that rapidly increases to, say 60/40, and then over time more slowly to a more steady and consistent 65/35.
The following shows how the number of needed winning trade pips decreases with increasing skill, i.e. a better W/L Ratio:
As you can see, making a 20% return on any sized account becomes easier, for lack of a better term, the more you improve your trading, actually the pace of your trading. But the caveat to that is that personal boundary to your actual long term skill level.
Look, this is just like learning to play the piano, or do gymnastics, or fix a car: everyone, at some point, reaches their own personal level of expertise.
In trading, being at least 'wonderful' can make you a lot, a lot, of money. But you have to work, and you have to understand — and accept — what your limitations are. What I refer to in trading as your own personal 'pace'.
As I showed in the W/L variance list, through work — the correct type of work and study — you'll get better. And over time, you'll get good. But 'how' good you don't know. You won't know what that limit is unless you understand pacing in trading, and where your own personal pacing ability lies.
Once you know what your optimum trading pace is, you'll be able to expand your trading results dramatically through the next phase of your development: the confidence that you have to walk away from a bad trade, and push it to the floor on the good trades without fear of loss. And that's a whole course/seminar on its own.
Companion VideoHere's that companion video of the same title: How To Pace Your FOREX Trading I mentioned at the start of this post that puts all of this together from a different view point.
Thanks for taking your time to read this post,
Peter
p.s. For more of my thoughts on trading in the FOREX foreign currency market, check out my YouTube channel for Longwood Currency Trading