Hi,

As you can gather I'm new at this ;-). First, I want to say this is a great forum as everyone helps eachother, with a high level of friendlyness, so I'm glad to be hear.

I've been reading books and playing with a forex demo account to get the mechanics of trading right as well as trying to spot some patterns and trying a few strategies. I found the amount of advice from books and the net overwhelming, so I took a step back and tried to cut this business back to the bone, and come up with some facts I could be sure of. I expect the following is in the text books somewhere, but anyway, finding out for myself has been a great excercise. Also I don't like to take things on trust, I feel better when I've worked them through myself.

I looked at the situation of a theoretical "ideal market". One commodity or currency pair moving with a random walk, and no house take.

Of course over time, your expectancy of such a market must be zero. To convince myself of this I wrote a little program in C++. First I made the price random walk and checked that whereever I set the stop and limit made no difference to the outcome over time. The price was set to move up or down by a random value between -10 and +10 each cycle.

As you would expect it made no difference.

Next I modelled the addage that trending markets tend to continue by setting a flag to continue or break a trend and playing with the probability that the trend would break. Again, it made no difference. From 0 upto 100% chance that the trend would break each cycle, there was no difference. Still a zero sum game.

Next I tested the addage that you should let your winners run and cut short your losers by chasing a winning trade with a trailing stop. No matter what the trail was, it made no difference.

I think all the above I could have deduced by logic, as there can be no tactic to improve your odds in a 50-50 game.

Next I took a look at the spread. I calculated that with a 5 pip spread and using 100 pip stop and limit you lose 10 times and win 9 times in 20 trades.

It's not quite that, but near enough. This means you need to have a better than 53% guess rate to break even.

If you use tighter stops this increases. For a 50 pip stop either side you need to be right 55% of the time, and a 40 pip stop either side 62%.

My simulation showed that it doesn't matter where the stops are, only the gap between them is important.

I'm unsure how relevant my calculations are to the real world, but I'd welcome any comments.

thanks in advance

dave

As you can gather I'm new at this ;-). First, I want to say this is a great forum as everyone helps eachother, with a high level of friendlyness, so I'm glad to be hear.

I've been reading books and playing with a forex demo account to get the mechanics of trading right as well as trying to spot some patterns and trying a few strategies. I found the amount of advice from books and the net overwhelming, so I took a step back and tried to cut this business back to the bone, and come up with some facts I could be sure of. I expect the following is in the text books somewhere, but anyway, finding out for myself has been a great excercise. Also I don't like to take things on trust, I feel better when I've worked them through myself.

I looked at the situation of a theoretical "ideal market". One commodity or currency pair moving with a random walk, and no house take.

Of course over time, your expectancy of such a market must be zero. To convince myself of this I wrote a little program in C++. First I made the price random walk and checked that whereever I set the stop and limit made no difference to the outcome over time. The price was set to move up or down by a random value between -10 and +10 each cycle.

As you would expect it made no difference.

Next I modelled the addage that trending markets tend to continue by setting a flag to continue or break a trend and playing with the probability that the trend would break. Again, it made no difference. From 0 upto 100% chance that the trend would break each cycle, there was no difference. Still a zero sum game.

Next I tested the addage that you should let your winners run and cut short your losers by chasing a winning trade with a trailing stop. No matter what the trail was, it made no difference.

I think all the above I could have deduced by logic, as there can be no tactic to improve your odds in a 50-50 game.

Next I took a look at the spread. I calculated that with a 5 pip spread and using 100 pip stop and limit you lose 10 times and win 9 times in 20 trades.

It's not quite that, but near enough. This means you need to have a better than 53% guess rate to break even.

If you use tighter stops this increases. For a 50 pip stop either side you need to be right 55% of the time, and a 40 pip stop either side 62%.

My simulation showed that it doesn't matter where the stops are, only the gap between them is important.

I'm unsure how relevant my calculations are to the real world, but I'd welcome any comments.

thanks in advance

dave