Hi,
I have a technical analysis strategy that i am looking at back testing. However, when I started to do this i realised that i am unsure how to plot my SL & TP levels. Each trade has a risk of 1% of my trading capital.
The capital I am using is £5,000
Risk per trade is 1%
R:R is 1:2
What i am struggling to understand is how i plot my SL and TP for the back testing. I realise that my monetary value is £50 SL and £100 TP. However, if the lot size is different per each trade the actual number of pips will be different. If I test based on the same lot size, say 0.5, then when the price increases and decreases over time will this then impact the overall success rate of the strategy?
For example my SL & TP for a 0.1 lot size trade will be different to a 0.5 lot size trade.
I am sure i am overthinking / missing an obvious step but would appreciate someone breaking it down in to basic steps for me
Thanks
Hey man, hope you’re well. So your account is 5k and you want to risk 1% a trade which is £50. So no matter how many pips the stop loss is the total risk should be £50. Therefore yes for every trade the stoploss may be different and therefore the lot size must also be different.
Eg, 10 pip stop loss means each pip is worth £50/10 = £5 per pip which is 0.5 lots.
20 pip stop loss means each pips is worth £50/20= £2.50 per pip which is 0.25 lots.
And so on.
Dont know if it will impact the overall strategy as it may work. But you cant reach any reliable analysis from your strategy.
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Hi,
Thanks for your reply, that’s been helpful for my understanding.
So i have seen this MACD strategy on youtube which is backtested in the video (https://youtu.be/nmffSjdZbWQ). They use a 1% SL but based on what you have said i don’t know how the results they say can be accurate. It doesn’t give any other detail on SL other than saying risk is 1%, surely the SL level rules must be determined first (i.e return to 200EMA, 1xATR, above / below candlestick).
The SL on each trade will always be different even if using the same strategy as the patterns, structure and market price on each will be different and therefore the entry and exit levels will be different distances for each trade meaning lot sizes will also be?
It may just be a poor videos that has confused me but would appreciate your input.
Thanks again
The video is fine. But dont take it as gospel, you’ll have to do the backtest yourself. Looks like his stop loss is at prior high or prior low. His risk is 1% and his stop loss changes depending on where the prior high/low is. Therefore no matter whether that’s 20 pips away or 50 pips hes only risking 1% as I calculated above.
Because he is always risking 1% and is at prior structure. He can continue to trade like this going forward. Also when the trade didnt make sense he didnt take it. So he has rules which he follows. Therefore his analysis is reliable for him because he knows exactly how he took the 100 trades. No matter how quiet or volatile the market his stoploss is at a particular place.
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Thank you that has been really helpful (again!)
Just one last thing if i may, when creating a strategy does the lot size need to be fixed or does that change as per SL level or does lot size even need to be included in a strategy at all?
If the lot size does change does that change how i would backtest or does the lot size not impact the strategy?
Thanks
The right answer is you can try your strategy with a fixed lot size or one that changes with the SL. Theres no reason that both cant be profitable. However, from experience I’d say that a fixed lot size and therefore a fixed SL level is assuming the market conditions never change. So 6 months ago you may have tested and found 50 pip stop loss at 0.5 lots is fine for ALL trades. But now due to coronavirus that 50 pip stop loss is nothing due to volatility and you actually need 100 pip stop loss. But you wont know that because your analysis says fixed works. By the time you work it out you may have lost a lot or blown the account due to emotion. So MY answer is lot size doesnt need to be included in the strategy just 1% risk and a repeatable place where SL can be placed. Other people may do differently which is fine- im only going from my own experience.
No the lot size doesnt matter. It’s how much you are risking per trade. So if you are risking 1%, some trades might have a 10 pips SL and others a 50 pip SL both will be different lot sizes. You need a consistent place to put the SL eg end of candle, 50ma, below recent high/low. That way you can consistently take the same set up again and again and analyse your trading.
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