Are you a forex trader or a gambler?

Here's an article I found in my files. Given the approach of the New Year, now is an excellent time to re-enforce those good trading habits and thoughts ... enjoy!!

How many pips do you need to be wealthy? The answer may surprise you.

A very common thought and question among us forex traders. Of course this is variable in desires; however it is a good idea to put things into perspective. In reality, the following is what separates the gamblers from the traders.

About 2 years ago I sent out a similar letter that changed the outlook and the lives of many traders. While most at the time were mini-traders a simple 25 pip gain equated to a mere $25.00. "How can I live off of that?" I was repeatedly asked. It didn't take long to put this into perspective.

Determining Percent Return

Profits are one thing, percent return is another. Monthly profits may add up to look nice or not so nice, but what is the actual return? I am sure we have all heard traders say, "I made 1,000 pips last month." OK.. what was your percent return? Not only for one month, but for the life of your trading.

Return Calculation

The simple return calculation is used to determine your return on an investment after you sold it. Or in this case, the profits after closing trades over a period of time.

Here is the formula:

Net Proceeds /Cost Basis - 1 x 100

Let's run through a simple example.

Suppose you traded one standard forex contract for a profit of 200 pips. This would be a raw profit of $2,000. The cost in this case was the spread and the margin needed to secure the contract; the most common margin is 100:1. Thus it cost a temporary, $1,000 to secure this contract. We say temporary because we all know we would not trade without a stop loss, most likely the stop would have been worth about $250.

Calculation:

Net Proceeds = $2000

Cost Basis = $20 (spread) + $1,000 margin

($2,000 /$1,020 - 1) x 100 = 96% (Just under 100% in a single 30 days)

So, if you are trading with a 100:1 margin and averaging around 200 pips per month, you are close to a 100% return per month.

What about per year?

Try it, you will be amazed. Hint: Don't forget to compound.

Take Home Message

Trade conservatively, a few 25 pip trades per week (300 pips per month) on a single lot can give you a return of just under 200% a month. Build your account slowly, trade with the same level of caution, just add more lots. This is the best method, the most realistic method and the lowest stress method of enjoying the rewards of forex.

John Keister

ForexInterBank

http://www.forexinterbank.com