I'm new to the forex scene (9 weeks and counting) but I'll add my two cents. I come from a programming background, and last month I decided to look into the dealbook programming language. After several weeks of all nighters and furious coding, testing, tweaking, and more testing, I came up with an EA for the GBP/USD pair that averaged about 800 pips per month. The catch, stop losses were based on previous day price action levels. Whenever I tried to add a reasonable stop loss (a set pip amount, like 20, or 50, or 200) the pips won count was drastically reduced.
No big deal I thought, this is great!
But I had the nagging feeling it was too good to be true, so I dug a little deeper. Then it hit me. Sure, if I had a huge bankroll I could easily withstand a -400 pip floating loss until the market turned itself back around. But alas, my bankroll will not be big enough to handle those kind of floating losses
.
I think this is where risk to reward comes in. If your setting a 50 stop loss, you should be sure there is a better chance than not that the gain will be at least double, or triple that. If it's not you don't enter. How do you figure that out? I'm not 100% sure yet, but I think it has to do with grunt work (meaning drawing trendlines, using fib ratios, or whatever else is available to try and figure out where price
might be going.
That my understanding at least, someone will correct me if I'm wrong...