Postby MightyOne » Mon Dec 21, 2015 8:38 pm
Why do we double?
If you risk $100 to make $200 then you are getting 2:1 on your money.
While such a ratio might be "fantastic" for some it is not enough for most.
Let's look at what happens as we require more doubles after our initial entry:
0 Doubles: $100 to make $200, 2:1
1 Double: $50 to make $200, 4:1
2 Doubles: $25 to make $200, 8:1
3 Doubles: $12.50 to make $200, 16:1
4 Doubles: $6.25 to make $200, 32:1
5 Doubles: $3.12 to make $200, 64:1
6 Doubles: $1.56 to make $200, 128:1
You either lose x% or you win y%, there is no such thing as a "partial win/loss", you either
reach your target using the initial and acquired space or you fail.
We can't just trade smaller because as you halve your size you multiply the distance to the target:
0: 20 pips
1: 40
2: 80
3: 160
4: 320
5: 640
6: 1,280
We need to double x number of times to pull the target back within reach of shorter
periods. Every time that we double we halve the distance to success, the downside is
that we also halve the distance to the destruction of our space.
Putting it into practice:
If we want to make 5% then we need to break it down into at least 14 parts for a maximum risk of 0.3571% per trade. The risk will always be capped at 0.3571%, no matter how many times you double, because you will be normalizing your risk.
We have $10000, our target is +$500, our risk is $35.71 (~1/14).
We divide the target by the ATR, lets call it 100, and we see that we need $5 P%PS ("big pips").
We then divide the dollar value of the "big pips" according to the number of doubles, in the case of 3 doubles we divide by 8 as
1 x 2 x 2 x 2 = 8.
We now see that each small pip is $0.625 and we have 57.1 pips of space.
If your lots add up to $0.60 then you have (.625 / .6)57.1 or 59.4 space &
your target is about 4.1% further away (nothing to worry about).
You don't need to risk all 57.1 pips on one trade, you can set a 10 pip stop and use the space
as if you had accumulated it to resize your trade.
For instance: if you make 10 pips then you have 67.1 pips. After you double, your total space is 33.55 and a 10 pip stop leaves 23.55 pips on the shelf should you get stopped.