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General Forex Discussion
What is your daily Profit Target?
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[QUOTE="PaladinFX, post: 36246, member: 18784"] You reference in pips or per cent, because that's the only way to measure gain in a neutral fashion. You cannot compare the effectiveness of two systems by comparing gain in dollars or euros, unless both accounts a) use the same primary currency; b) use a fixed position size for each and every trade (which isn't feasible because it voids money management). Which trade setup is better and more effective? [I]System 1[/I]: position size = [COLOR="Blue"]4.0 lots[/COLOR] / stop-loss = [COLOR="Red"]45 pips[/COLOR] / pips gained = [COLOR="Green"]15[/COLOR] / profit in USD = [COLOR="DarkOrchid"]600[/COLOR] [I]System 2[/I]: position size = [COLOR="Blue"]1.0 lots[/COLOR] / stop-loss = [COLOR="Red"]15 pips[/COLOR] / pips gained = [COLOR="Green"]30[/COLOR] / profit in USD = [COLOR="DarkOrchid"]300[/COLOR] If you compare the two trades using dollar gain as your criterium, [I]System 1[/I] appears to be more effective, because it has made double the profit of [I]System 2[/I]. But it used four times the lot size (i.e. for times the margin) and had a stop-loss 3 times as large as the trade made with [I]System 2[/I]. If you now open a trade with [I]System 2[/I], using the position size and S/L value of [I]System 1[/I], you'll get the following result: position size = [COLOR="Blue"]4.0 lots[/COLOR] / stop-loss = [COLOR="Red"]45 pips[/COLOR] / pips gained = [COLOR="Green"]90[/COLOR] / profit in USD = [COLOR="DarkOrchid"]3,600[/COLOR]. In conclusion [I]System 2[/I] is [B]six times as effective[/B] as System 1. This comparison method can be simplified (without the need to work out actual lot sizes, stop-loss values, pips and dollars gained) by simply comparing the Risk:Reward ratios of the two systems: [I]System 1[/I] risks 45 pips to gain 15 pips; R:R ratio = [COLOR="Red"]3[/COLOR]:[COLOR="Green"]1[/COLOR]. [I]System 2[/I] risks 15 pips to gain 30 pips; R:R ratio = [COLOR="Red"]1[/COLOR]:[COLOR="Green"]2[/COLOR]. Set Risk and Reward in relation and you'll get [COLOR="Red"]3[/COLOR]x[COLOR="Green"]2[/COLOR] = 6. Setting goals in absolute values (i.e. actual money gain) instead of in per cent (or preferrably pips, since this will allow the above effectiveness evaluation to be calculated without having to change parameters all the time) can easily lead to overtrading. Cheers, P. [/QUOTE]
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