It is no secret that trading forex has quite the learning curve, especially for novice traders. What’s more, 70 – 80% of all forex traders make a loss in the trade. These numbers may seem daunting, even downright discouraging to traders. Some traders opt to stick with overly complicated strategies, which more often than not lead to loss. However, in as much as trading strategies should ideally be tailored to the needs of each individual trader, there are some universal strategies that have been known to yield promising results. One such strategy is the 50 pips a day technique, which is one of the most straightforward strategies to ever exist.
What the strategy entails
Essentially, the 50 pips a day technique is a day trading strategy. This means that no positions are left open overnight, regardless of whether they are in profit or loss. What’s more, the strategy will involve making a single trade per day on a currency pair. For these reasons, it is not suitable for traders who prefer placing multiple trades a day, or those that fancy long-term trading.
The main idea behind this strategy is to take advantage of 1/3 to ½ of the daily range of a currency pair’s movement. It follows then that we should only trade pairs with at least a daily range of 100 pips or more. These tend to be the most popular major pairs, such as the EURUSD and GBPUSD.
How it works
We have established that the two best currency pairs for use with this technique are EURUSD and GBPUSD. Both of these pairs characteristically see the most volatility during the London session, which starts from 7:00 AM to 4:00 PM GMT. This strategy aims to take advantage of this volatility.
Therefore, the first thing you’ll need to do is adjust your chart’s timeframe to one hour, and locate the 7:00 AM GMT candlestick. The trend set during the London session tends to set the pace for the rest of the day. Thus, the next step involves waiting for the first London session candlestick to close, then observing the direction in which the subsequent candlestick will follow.
To achieve this, place two pending orders above and below the 7:00 AM candlestick’s close. Ideally, a buy order should be placed 2 pips above the first candlestick’s high and a sell order two pips below the candle’s low. Depending on which direction prices follow, one of the two orders will be activated. When that happens, close the other order.
From this point, you will want to manage your risk. This is done by placing a stop-loss 5 to 10 pips above or below your entry price. If you activate the buy order, your stop loss will be below your entry point. For the sell order, it will be the opposite. As you can guess from the strategy’s nomenclature, the profit target should be placed 50 pips away from the entry point.
Importance of risk management
As you may have noticed, this strategy does not utilize any indicators or much technical analysis, for that matter. In the forex market, trend reversals are a common occurrence, and winning positions could turn into losses in no time. What’s more, political and economic events from the countries behind the currencies we’re trading could have a quick and detrimental effect on the currency pair’s price.
For these reasons, a stop loss is always necessary so as to stop you out just in case the trend you trade is reversed. Additionally, the stop loss limits your losses so that your account equity does not suffer an irrecoverable hit.
Is a 50-pip daily profit worth it?
The amount of profit you rake in daily in dollar amounts depends on the lot sizes you trade. Assume, for instance, that you are trading one standard lot of the EURUSD pair. For every pip in profit, you make, you’ll be adding $10 to your account equity. Therefore, a 50-pip profit will translate to $500 in profit from a 100,000 Euro (or $114,448 according to the exchange rate at the time of writing) investment.
If, instead, you’re trading a nano lot of the same pair, one pip in profit will translate to $0.01. This means that the whole 50 pips will earn you $0.5 in daily profits, from an investment of 100 Euro (or $114.44). This may not seem like much, but once the profits are tallied cumulatively over a period of time, they amount to a substantial figure.
Pros and cons of the 50 pips a day strategy
Pros
- Other than closing the order that was not activated and setting up profit targets, and stop losses, this technique does not require the trader to actively monitor the trade. They can just set it up and wait for profits or losses at the end of the day.
- It prevents overtrading as you are limited to one trade per currency pair in a day.
Cons
- It’s not suitable for traders who prefer making multiple trades a day.
- Profits are limited to 50 pips.
- It can lead to losses if the trader forgets to cancel the other order.
Word to the wise
There are several vital things to keep in mind when trying out this strategy. First, never attempt to predict the direction the market will follow after the 7 AM candlestick. Always place two pending orders and wait for the market to activate one. Second, never forget to cancel the order that was not activated.
As aforementioned, a stop loss order is of paramount importance when performing this strategy. Also, this strategy is not limited to the forex market – you can always try it on other financial markets such as stocks.
Conclusion
The 50 pips a day strategy is a day trading technique that seeks to take advantage of approximately half of a currency pair’s daily range. It involves waiting for a market trend to begin during the start of the London session, then aiming for 50 pips in profit in the direction of the trend.
