How big is your pip? The answer to that question will determine many things including whether you can survive the markets for more than a week to how much you can realistically expect to make on your capital.
Now if you were Donald Trump -- you would no doubt say that your pip is HUUUUGE. But then Donald Trump went bankrupt four times and any equity investment in his companies lost 90% of its value so I really don’t want to trade like Donald Trump because I don’t get to play with other people’s money.
I risk my own capital so my pip is tiny. For every 10,000 of capital my opening trade is 2,000 units. That means my pip is worth just 20 cents. A typical profit on my day trading account of 10 pips earns me just 2 basis points. That’s right you don’t misread me. I make 2/100th of 1% on any given 1st trade I make. On the second level trade I earn a whopping 8.5 basis points. Of course when I lose I only lose 30 basis points of just 1/3 of 1%.
Why is my pip so small? Because I day trade and I make money from volume not size. When you are doing a lot of volume (trades) you need to make sure that any one loss is very small. On a typical day I try to do 10-15 trades and make 10-20 basis points. That may not sound like much but at 250 trading days a year it can add up to 50% on your money. More importantly it produces equity curves like this.
My gains may be small but my drawdowns are very controlled. If I do earn anywhere between 25-50% this year, my drawdown should not be any worse than -15%. Now you may think I am a wuss. You may want to try to double your account in which case you’ll have to trade 3 times as large as me or make your pip worth 60 cents per every 10,000 of capital. But beware -- you may indeed be able to make 50 basis points a day that way -- achieving 100% annual gains but at the risk of drawing down -50% or more of your equity. More reward always means that there is more risk involved and the key question you need to ask yourself is whether you’ll continue to trade if you lost half your money.
When the money is not yours the answer is easy, but when it is I am not so sure most of us could take such pressure. As someone in my room remarked today “I’d rather be trading small forever than trade big for a week.”