Below is an article I came across about 5 years ago of which I printed out and put into my trading folder. I have actually condensed it for this post, otherwise it would be longer than it is here. I want to first admit that I have not made a million dollars doing this. Due to various life distractions, I have never fully commited myself to forex trading the way I should, and thus I am not a successful trader. Don’t base the possibilities of what can or cannot be done through my lack of success. Anyways, a thread here in the forum made me think of this article, after someone in that thread said it would take an account of a few hundred thousand dollars to make a living off of trading. My purpose in going through the time & trouble of typing all this info into this post is to show that, starting with only a $300 super-mini account, it is possible to make a huge sum of money in under 4 years. So, without further delay, here is the article below of which I have condensed:
The real POWER of the earning potential with the Forex is the financial leverage. We can purchase 1 lot (super-mini) for just $5, and the broker/bank puts $1000 in the trade on our behalf. There’s just not any leverage like this anywhere else in the world. Now, the way we optimize our leverage and earning power is to trade the maximum numbers of lots per trade. That is going to be determined by our account balance, our risk factor, and the stop loss used in the trade. So, let’s look at this closer:
If we open a super-mini account with $300 and we determine we will abide by a 5% risk factor, it means on trade #1 we will not have more than $15.00 at risk in the trade ($300 x 5% = $15.00).
We know that what is at risk in the trade is the number of pips in the stop loss times the value of the pip (in this situation we are using a 25 pip stop loss and the pip value is .10 cents per pip, thus 25 x .10 = $2.50). This allows us to determine how many lots we can optimally trade AND yet remain within our 5% risk factor. Let’s review:
Account balance: $300
Risk Factor: 5.0%
At Risk in Trade: $15.00
Stop-Loss: 25 Pips
Value of Pip: $.10
Value/Risk of Stop Loss per Trade: $2.50
Thus to calculate the maximum number of lots we can trade:
[(Account Balance) x Risk Factor) / (Value of Stop Loss per Trade) = Max Lots in Trade
[ ($300.00 x (5.0%) ] / $2.50) ] = 6 lots
$15 / $2.50 = 6 lots
By always trading the maximum number of lots (and yet remaining within our money management risk factor), we can optimaize our earning potential and yet achieve this with very calculated and conservative risk.
Raw Pips Versus Leverage Pips … How It Determines Our Income Possibilities: If we trade 1 lot, and gain 5 pips, how much did we just make? Well, in a super-mini, remember, a pip is worth $.10. So, with a 5 pip gain, we just earned $.50, right? Right.
Thus, if we gain 5 pips, but we traded with our maximum lots (as allowed by using our risk factor), we would gain 5 pips x 6 lots, or 30 pips. 30 Pips x .10 = $3.00.
Putting It All Together: If we have $300 in our account, in order to earn a 20% return (regardless of time frame) we would need to earn $60 ($300 x 20% = $60).
We also know with $300, we can trade 6 lots in a trade and yet remain within our 5% risk factor strategy. We just learned that 6 lots, with a 5-pip gain, earns us $3.00. Thus, to earn $60, if would take 20 such 5-pip trades:
1 trade of 5-pips earns us $3.00 … then 20 5-pip trades would earn us $60 (20 x $3.00 = $60.00)
Thus, 100 raw pips are necessary to gain a 20% return when using a 25-pip stop loss! (When using a 5% risk factor and maximizing the number of lots trades)
Establishing A Trading Plan To Earn 20% On Your Account: We know that the Forex trades 5.5 days a week (starting Sunday 2PM eastern), which essentially is a 6-day trading week. That means there are approximately 25 to 28 trading days each month. If you took the weekends off, an occasional day to go to the beach or the mountains, or to sleep in when it rains, let’s assume you could average 20 trading days a month.
Thus, if you extablished a goal of earning JUST 5 PIPS per day, you would gain 100 pips in your 20-day trading month. 100 pips gives you 20% on your entire funded account!
Once you have some skills, you will see that you can apply those skills and establish a target of 20 pips per day trading. Now, this is above the dealer spread, and considers some losses (gain 5 pips, gain 4 pips, lose 3 pips, gain 7 pips, gain 5 pips, lose 4 pips, gain 6 pips … for a total gain of 20 pips). Thus, you can earn 100 pips in a 5-day trading week. With the proper skills, you can earn 20% per month, week, or even day!
Summary: With a 25-pip stop loss, it will always take 100 pips to earn a 20% return. It’s not dependent on time, just when you earn those 100 pips.
Lastly, you can take your $300 number, put it in an Excel Spreadsheet, and calculate the next cell by taking the $300 and giving it a 20% return and ending up with $360. Then, take the $360, and give it 20%, and so on. What you’d discover, is that in just 45 periods of 20% return, you can take your $300 and turn it into $1,097,000.
If you were earning a 20% return per month, that means it would take 45 months to go from $300 to over $1 Million (and you did that earning just 5 pips per day during the trading month).
If you were earning 20-pips per day (giving you a 20% return per week), it would then take just 45 weeks to go from $300 to over $1 Million.
Do you see HOW REAL the potential of the Forex truly is?
OTHER USEFUL NUMBERS:
To gain a 20% return, it takes 100 pips
To gain a 25% return, it takes 125 pips
To gain a 30% return, it takes 150 pips
EDIT: It may not have been made clear enough in the above article that the “5 pips a day” is only an AVERAGE. You DO NOT have to actually make 5 pips EVERY day. You can make 25 pips on one day and not have to trade for the rest of the week (using a 25 pip SL and 5% risk per trade). Or, you can make 100 pips on one day and not have to trade the rest of the month. There are a number of ways to get your 100 total pips per month without having to make those pips each individual day. As the author says in the article: “With a 25-pip stop loss, it will always take 100 pips to earn a 20% return. It’s not dependent on time, just when you earn those 100 pips”. Remember, the author’s bottom line goal is to make it workable for you to make 20% per month and to compound your money.