In his book "10 Minute Forex Wealth Builder!" Dean Sanders presents two systems. In his breakout system on daily chart he uses 50 pips SL on EURUSD (same for many other currencies) and 100 pips TP. R/R will be 1 : 2, and there is little monitoring, so most trades will end up -50 pips or +100 pips.
His claim about the system being profitable is not disputed on the net.
The requirements for this system being profitable is winning rate being larger than 33%.
How profitable is the system? 2%, 5% or 10% per months?
I started to wonder and applied Floor Traders Essential Toolbox on the problem
http://forums.forex-strategies-revealed.com/floor-traders-essential-toolbox-t279.html
Obviously there will only be some few trades (inside days) each month on a single currency.
I tested 2 winning trades and 3 loosing trades per month.
Profit trades = 2
Loss trades = 3
SumProfitPips = 200 (100 * 2)
SumLossPips = 150 (50 * 3)
Strategy: 10 Minute Forex Wealth Builder Breakout strategy
Trades per month: 5
Average profit: 100 pips
Average loss: 50 pips
Profitable trades: 40%
Profit per trade: 10 pips/trade
Max risk level: 5,08%
Return per month: 1,95%
Average drawdown: -23,54%
That will be 2% per month. 40% winning rate seems reasonable enough for me to accept. The point I will make is valid even if winning rate is 36% or whatever.
Applying the strategy on 6 majors should give us more return per month
Profit trades = 12 (2 * 6)
Loss trades = 18 (3 * 6)
SumProfitPips = 1200 (200 * 6)
SumLossPips = 900 (150 * 6)
Strategy: 10 Minute Forex Wealth Builder Breakout strategy
Trades per month: 30
Average profit: 100 pips
Average loss: 50 pips
Profitable trades: 40%
Profit per trade: 10 pips/trade
Max risk level: 2,54%
Return per month: 9,65%
Average drawdown: -12,75%
Much better indeed, as expected.
My problem is this:
If we instead of using TP = 100 and SL = 50 apply averaging with 3 contracts, like TP1 = 33, TP2 = 66, TP3 = 100, and SL1 = -25, SL2 = -37, SL3= -50, what effect will averaging have?
Using 3 contracts instead of 1 contract means each trade will have a multitude of outcomes:
Best case: 33 + 66 + 100 pips / 3 => 67 pips
Worst case (-25 - 37 - 50)/ 3 => -37 pips
Between these extremes there will be all kind of combinations that I have not computed, but roughtly it will something like this
-37, -27, -17, -7, -2, 5, 15, 25, 40, 55, 67
Assuming average profit on each trade will be reduced by 33% and average loss reduced by 33%, then we have:
Average profit - 66 on 3 contracts => 22 (66 is 66% of 100 pips)
Average loss - 33 on 3 contract s => 11 (33 is 66% of 50 pips)
Profit trades = 12 * 3 => 36 (3 because every trade will consist of 3 contracts)
Loss trades = 18 * 3 => 54
SumProfitPips = 36 * 22 => 792
SumLossPips = 54 * 11 => 594
What kind of return per month will that give us?
Strategy: 10 Minute Forex Wealth Builder Breakout strategy
Trades per month: 90
Average profit: 22 pips
Average loss: 11 pips
Profitable trades: 40%
Profit per trade: 2 pips/trade
Max risk level: 2,01%
Return per month: 16,96%
Average drawdown: -7,24%
just by using money management with averaging, more profit and less drawdown
kjell
I'll be glad to comment on. 