Hi all,
Just got a debate here with myself on what makes more sense… FIXED or VARIABLE bracket orders?
ACCOUNT
Trading Style: Scalping
Capital: $2000
Risk: 5%
T/P: 10 pips
S/L: 5 pips
RiskReward 2 : 1
Spread 0.5 pips
Commission 2$/lot
Just to get few things out of the way… let’s quickly convert %'s and pips to $.
Risk of 5% is $100 over 5 pips. This means 1 pip is $20.
Therefore, to get our RiskReward we are looking at $200 T/P.
To get $200 over 10 pips we need to have a position size of 2 lots (EURUSD).
Spread of 0.5 pips is $10.
Commission is $8 (OPEN & CLOSE) for 2 lots.
Having a steady 2 : 1 ratio, means that a win rate of 33% is B/E (Fees not included).
…Including fees the RR is adjusted to 1.54 : 1 moving our B/E point to 40%.
Now, having the risk management partially out of the way let’s get into some probabilities.
Assumption 1: MARKETS ARE RANDOM
RR of 1:1 means that you need 50% win rate to B/E. You have a 50% chance of reaching either your T/P or S/L. Giving an expectancy of $0.
RR of 2:1 means that you need 33% win rate to B/E. BUT you have 33% chance of reaching your T/P and 67% chance of reaching your S/L. So, overall expectancy is also $0.
You can try any probability systems out there but if the market is really random then it is not possible to be profitable when you start to consider all the fees… which leads to the assumption that markets are NOT random.
Assumption 2: MARKETS ARE NOT RANDOM
This means that the markets can be predictable in some degree. Knowing how to find and exploit these situations is the EDGE we need to overcome the $0 expectancy from Assumption 1.
So the CHART is our primary focus here now - patterns, support & resistance levels, indicators, candlesticks etc. (you can also include fundamentals but while scalping it’s mostly technicals)
We’re slowly coming to an end now… and here’s the problem that I’m trying to understand
EXAMPLE SCENARIO
We see an upward trend, which already had 2 pullbacks of 3 pips and a run of 8 pips before each pullback.
We enter the market on 2nd/3rd pip of the 3rd pullback as we see a continuation-of-trend candle appear.
WHY set a S/L at 5 pips below entry? When we know that all the previous pullback were only 3 pips and that we opened a position at the bottom of the pullback meaning that if we were to get stopped… it would’ve been an 8 pip drawback (which could indicate a complete change of trend by the time our position gets stopped).
Also, why set a T/P away 10 pips when we know that the run ups were only 8 pips and that the trends don’t continue on forever?
Would it not be more reasonable to have a S/L just below the bottom candle of the pullback (let’s say 2 pip S/L) and keep the position open until you see the market reversing again?
This seems to greatly increase your RR (as decreasing S/L by even 1 pip when you’re aiming for 10 pips is worth 10%!) and you are also trading with the market rather than trying the market to trade with you.
I’d say you could have hard-stop at 5 pips and a mental stop below the low of the candle but I don’t really see how FIXED bracket order comes out ahead of a VARIABLE bracket order.
Only difficulty when trading VARIABLE bracket order is keeping track of risk management as your S/L and T/P changes with the market.
That’s everything!