Hi,
As you can gather I'm new in this;--RRB-. To begin with, I want to state this is a great forum as everyone helps eachother, using a high amount of friendlyness, so I'm happy to be listen.
I have been reading books and playing with a Currency Market demo account to get the mechanisms of trading right as well as trying to spot a few patterns and trying a few egies. I discovered the amount of advice from books and the net overpowering, so I took a step back and attempted to cut this business back to the bone, and come up with a few details I could be certain of. I anticipate the following is from the text books somewhere, but finding out for myself was a fantastic excercise. Also I do not like to take things on trust, I feel better when I have worked them .
I looked in the situation of a theoretical perfect market. 1 commodity or currency pair moving using a random walk, and no home take.
Of course over time, your expectancy of such a market must be zero. To convince myself of this I wrote a tiny app in C . First I left the price arbitrary walk and checked that whereever I put the stop and limitation made no difference to the results with time. The price was set to move up or down with a random value between -10 and 10 each cycle.
As you'd anticipate it made no real difference.
Then I modelled the addage that trending markets tend to continue by setting a flag to break or continue a trend and enjoying with the probability that the tendency could break. Again, it made no real difference. From 0 upto 100% chance that the tendency would break every cycle, there was no difference. Nevertheless a zero sum game.
Then I tested the addage that you ought to let your winners run and cut short your losers by pursuing a winning trade using a trailing stop. No matter what the course was, it made no real difference.
I believe all of the above I could have deduced by logic, since there can not be a tactic to enhance your odds in a 50-50 game.
Then I took a look at the spread. I calculated that using a 5 pip spread and utilizing 100 pip stop and restrict you shed 10 occasions and win 9 times in 20 trades.
It's not quite that, but close enough. This means that you need to have a better than 53% figure rate to break even.
If you use tighter stops this raises. To get a 50 pip stop either side you need to be right 55 percent of the time, and also a 40 pip stop either side 62%.
My simulation showed that it isn't important where the stops are, just the difference between them is important.
I'm unsure how relevant my calculations would be on the real world, but I'd welcome any comments.
Thanks in advance
dave