I took a poll here in the Babypips community for the most popular time frame that people use for trade execution. To my surprise it’s the daily time frame, which is great. But from my time on this board, I hear the neophyte traders screaming 2 things over and over, Can Someone share a profitable strategy? And Why do I keep getting stopped out so much? The broker must be hunting my stops! I am here to bring you a quantified result to help you get an understanding of what your 2 failures are in this area. I believe whole heartedly this will help struggling traders. It’s not an entry, an indicator, a signal provider, whatever Holy Grail seeker wants. It’s purely trade management.
Let’s get the base of this research out of the way here. I have used daily data of the EUR/USD pair from 1/1/1999 the first day the Euro was allowed to be an accounting currency. I am using 1 minute bars as the minimum granularity and combining them together to become a daily bar, so there are 5760 points of data per daily bar (OHLC * 1440). I created a random entry system with a 50/50 bias that will take trades on the daily bar and enter at the market either long or short. I used the 14 day average daily range as a baseline 122 pips, which is what it was when I did this calculation. This is using 1 lot as the baseline position size.
You can see here that it is basically 50% profitable trades, but the Expectancy is negative. Over 1065 samples taken which is statistically significant (~3% error estimated by 1/sqrt(#Trades)), So obviously taking random 1:1 trades loses money, we don’t think that anyone would disagree that monkey dart board trading would be profitable, did we?
Let’s go for a 2:1 Reward Risk ratio using 1 ADR for the stop loss and 2 ADR for the profit target.
Ok so our expectancy is worse than before, this is because our win rate goes down. That would be expected as we are pulling our profit targets farther away. If you have looked at my other studies in the Statistics and Technical analysis thread you know that this market is basically neutral, 50/50 chance to go up or down. So this is to be expected,
Continuing on to the 3:1 RR using 1 ADR stop 3 ADR profit target.
Wow ok now we have [B]POSTIVE EXPECTANCY[/B]. Oh boy, look we increased our Risk Reward by 1 R but our win rate only dropped a fraction of what it did from 1:1 to 2:1. Is this just a fluke?
4:1 RR using 1 ADR stop and 4 ADR profit target.
Nope not a fluke, 4:1 is also profitable. Ever wonder why people say you should cut your losers short and let your winners run?
So we have taken a random entry system profitable, this isolates the exits solely for construction of this experiment. We have taken the ability for trade management only using fixed stops, that are executed [B]CONSITENTLY[/B]. Not tampering not adjusting in any way purely set at the beginning of the trade. This is enough to give someone out there who can’t control their own consistency, playing with their trade exits. Also traders out there who are not getting good Reward Risk Ratios. Look, every system can be profitable, it’s all about the win rate to reward risk ratio. I am not saying high win rate low RR systems don’t work; I know they work because I trade them. But they require higher levels of consistency, which are what all novices do not have.