The 20 pip challenge or $20 / 30% challenge is one which captures a huge amount of interest among forex traders. That’s despite its very high level of risk in terms of standard risk management. Nevertheless, it’s a fascinating example of the power of compound interest. Plus, 20 pips a day in forex trading is doable.
How does the 20 pip challenge work?
The idea is really simple. By starting with just $20 and risking around 30% of it in order to gain 30% from a movement of just 20 pips, you may be able to develop a four or five figure account in a relatively short amount of time.
The end goal is that 30 successful trades result in fifty two thousand dollars.
Before we explore this concept, please note that our site disclaimer couldn’t be more relevant here. In particular, regarding the fact that neither this strategy nor any other should be considered financial advice. That’s because risking 30% of your account completely goes against the grain of good risk management, which states that you should never risk more than 1-2% of your balance per trade.
In fact, this isn’t even really a strategy. It more closely resembles a form of speculative entertainment rather than an example of good trading practice. If you follow it, you do so at entirely your own risk.
The appeal
Here are some of the reasons why this challenge is appealing:
- Some currency pairs can move as move as much as 100 pips a day, or even more. There’s plenty of opportunity to get just 20 pips in a day.
- It only costs $20 to start. Imagine if you started trading with a $5,000 account. If we take into account the standard 1-2% maximum level of risk of per trade, you’d stand to lose $100 if you hit a stop loss. So even though it’s a higher level of risk, you could fail this trade five times in a row and you would’ve still only lost an amount of money as if you were following good risk management practices on a much larger account. (However, that does NOT in itself make risking 30% of your capital per trade good risk management practice – it isn’t!)
- If you manage to progress through most of the challenge but then hit one or more losses, the psychological impact of losing hundreds or even thousands of dollars might not be the same as losing the same amount of money, if said losses were your original investment. After all, your original risk started with only $20.
- It’s fifty-two THOUSAND dollars. With that amount of money in your account, you could continue to make successful 20 pip trades, but this time, with sensible risk management practices. This could still generate a modest side income.
The trades
Below is a table of the trades you’d need to make, with how much you’d stand to gain and lose each time, as well as the necessary lot size.
| Stage | Balance | Risk | Profit | Lot size | Ending balance |
|---|---|---|---|---|---|
| 1 | $20 | $4.5 | $6 | 0.03 | $26 |
| 2 | $26 | $6 | $8 | 0.04 | $34 |
| 3 | $36 | $8 | $10 | 0.05 | $44 |
| 4 | $44 | $10 | $14 | 0.07 | $58 |
| 5 | $58 | $14 | $18 | 0.09 | $76 |
| 6 | $76 | $18 | $22 | 0.11 | $98 |
| 7 | $98 | $22 | $28 | 0.14 | $126 |
| 8 | $126 | $28 | $38 | 0.19 | $164 |
| 9 | $164 | $38 | $48 | 0.24 | $212 |
| 10 | $212 | $48 | $64 | 0.32 | $276 |
| 11 | $276 | $62 | $82 | 0.41 | $358 |
| 12 | $358 | $84 | $108 | 0.54 | $466 |
| 13 | $466 | $108 | $140 | 0.70 | $606 |
| 14 | $606 | $140 | $182 | 0.91 | $788 |
| 15 | $788 | $182 | $236 | 1.18 | $1,024 |
| 16 | $1,024 | $236 | $308 | 1.54 | $1,332 |
| 17 | $1,332 | $308 | $400 | 2.00 | $1,732 |
| 18 | $1,732 | $400 | $520 | 2.60 | $2,252 |
| 19 | $2,252 | $520 | $674 | 3.37 | $2,926 |
| 20 | $2,926 | $674 | $878 | 4.39 | $3,804 |
| 21 | $3,804 | $878 | $1,140 | 5.7 | $4,944 |
| 22 | $4,944 | $1,140 | $1,482 | 7.41 | $6,426 |
| 23 | $6,426 | $1,482 | $1,928 | 9.64 | $8,354 |
| 24 | $8,354 | $1,928 | $2,506 | 12.53 | $10,860 |
| 25 | $10,860 | $2,506 | $3,256 | 16.28 | $14,116 |
| 26 | $14,116 | $3,256 | $4,234 | 21.17 | $18,350 |
| 27 | $18,350 | $4,234 | $5,504 | 27.52 | $23,854 |
| 28 | $23,854 | $5,504 | $7,156 | 35.78 | $31,010 |
| 29 | $31,010 | $7,156 | $9,302 | 46.51 | $40,312 |
| 30 | $40,312 | $9,302 | $12,092 | 60.46 | $52,404 |
What this means
Note that all of the above trades assume a take profit of 20 pips and a stop loss of between 14-17 pips. You should use a risk management/position size calculator to confirm the correct position size and stop loss.
As you can see, the gains of the first few trades are relatively small. But after a dozen successful trades, they start to run into triple figures. Come the early 20s, the profit starts to run into the thousands. And in the last few stages, 20 pips is potentially life-changing money.
Of course, if your first ten trades were successful, there is no reason why you couldn’t simply quit right there and take your money. Going from $20 to just over $200 is nearly a 1000% gain, which is surely a success by any measure.
20 pip challenge – the catch
However, there is a small catch: a relatively high amount of leverage would be necessary. For example, using an account in USD, opening a 0.03 lot trade of EURUSD at 1:30 leverage would require a margin of $104.085. Obviously, this isn’t possible if with only $20 in the account. At 1:200 leverage, the necessary margin is only $15.61275. However, it probably still wouldn’t be possible to open the trade, as there would be less than $5 free margin.
At 1:500 leverage, the required margin is $6.2451. This would probably leave enough free margin to open the trade, keep it open, and have enough free margin to avoid a margin stop out, which could potentially result in exiting the trade before the stop loss is hit.
If higher leverage is not possible, then the only alternative would be to deposit more than $20 so that the equity available can be used as the free margin, making it possible to open the trade and keep it open.