Money Management

Beginner Questions
1

Hi Fellow Traders,

Is a setup of Stop Loss set at 100 pips and a Profit target of 150 pips

a sound and profitable money management? I plan to use this in the 4HR

chart.

Thanks

Raffy

2

Pips aren’t enough… the monetary value of profit and loss should be within your risk appetite.

And it also depends on the batting average of your strategy.
If you have 50% win probabilty, then you will be fine but if your batting average is less than 50% that may not be enough.

3

Hi raffy,

that really depends from how many of your trades are [B]winning [/B]trades. I don’t know the exact formula for the calculations, but maybe someone can write it for you.

But the simple logic tells you, that if you loose 6 times 100 pips (600) and you win 4 times 150 pips (again 600), you’re break even. (if we don’t consider trading costs). So, out of 10 trades, you need [B]5 profitable[/B] (target) trades to have a positive expectancy.

But generally the risk reward/ratios should be at least 2:1, or better yet, 3:1, meaning (in your example) 100 pip stop and a 200 pip target or 100 pip stop and 300 pip target.

If you’re really interested in this, read the Trade Your Way to Financial Freedom from Van K. Tharp. It’s everything in there.

4

Btw, you should not worry too much about R/R anyway. I don’t use it at all.

  1. Over-Relying on Risk Reward � There is zero advantage in risk reward; if you put a 20 point stop and a 60 point profit your chances are probably 3-1 that you will lose; actually with the spread its more like 4 to 1 (from entry point if it goes down 17 points you lose or up 63 you win; 17/63 is close to 4-1).

This whole ([B]excellent[/B]) article can be found here.

5

Thanks guys, appreciate the help :slight_smile: