1. You Go Short (Or Long) a Pair. 2. Your Stop Loss Is 3 or 4 pips (Or Some Small Arbitrary number that you pick and stick with) 3. Your Profit Target For Each Trade Is To Double Your Account. 4. You Never Go Short (Or Long) at a Higher (Or Lower) Level Than the Previous Trade. 5. You keep Your Risk At Fixed Percentage of Your Account Always (Say 1 or 2percent) 6. No matter how deep the drawdown gets, you keep doing this. Tell me the flaw in this ?
It won't work because you haven't explained why the bank taking your bet should give you their money. As banks are rich from taking other people's money, they have the funds to move the price to your stop all day long. Or they may well be the market maker, in which case they can move the price without using any money. So why do they lose again ?
Based on what? A coin flip? Phases of the moon? Tips from your brother-in-law? You don't even have the beginning of a trading system until you can decide unquestionably when and in which direction to trade. Wow. You expect to double your trading account with each trade while risking only 2%. That's magical thinking, to put it mildly. Maybe you meant to post a different profit target. Taking big loses is the main reason traders go broke. If you have a large drawdown, clearly your system isn't working and you need a new and better one.
1. The first trade in the sequence could be based on a coin flip, yes. It really doesn't matter. You take the loss if there is one and don't make the second trade in that direction. For instance if you went long and lost, your next trade would have to be a short that is below that loss level, or a long that is at or above your first trade entry point. If it goes in your direction you leave it alone. 2. I never said each trade will double your account. You just want one that will. 3. I wouldn't be taking any big losses, just a bunch of small ones. Isn't the reason traders go broke because they take a few single big losses that they refuse to cut short ? Why wouldn't the reverse of this mentality not make big money regardless of entry point ?
The problem with this strategy is that you will experience a long string of losses that will mount up and blow up your account. The 3-4 pips is within the noise level of any actively traded currency pair. Money management is important, but having a system that has an edge is also very important. Trading noise will never work.
swingtrader123 has given you the best answer so far. It does look like you're trying to profit from randomness, which is a loser. It's all well and good to cut your losses and let your profits run but you have to have a reason to place a trade in the first place (e.g., trade with the trend). This is your edge: it increases your probability of success to where you can overcome the obstacles against you (the spread, slippage, bad news).
Yeah that sounds right. I came up with this idea mainly because I would always seem to get myself in trouble the same way. Having a decent strategy, following the trend, making money. Then one bad trade getting away from me that I couldn't psychologically get myself to cut for whatever reason until things got really bad. I figured reversing this mentality might be enough. But you definitely have a point regarding the spread and slippage since these things work against you. So it wouldn't quite be a reversal of the scenario.
It's not psychology but more experience, because you know when you cut the way you should, most if not all of your trades become losers. That's the real reason you don't cut. One thing with banks is that they have no respect for trends. All they are interested is to sell high to you and then buy back low from you at the stop. It makes business sense, after all they are a business. Random trading is no solution either given the banks propensity to move the price to exactly where they can make a profit. Perhaps reducing size and increasing the width of the stop can increase your chances. It's far less likely for the bank to move the price 500 points to chase after a 50 cents profit than they would chase after a $500 profit with a 100 point stop. Those who play trading and completely disregard what the other side of the bet is doing are destined to fail.
Another way to look at it would be like this. If someone were to come up to you and say. "I want to deliberately bust my trading account. How do I do this ?" What would be your advice to this person ? Wouldn't it be something like. 1. Take a trade against the trend. 2. If the market goes slightly in your favor, get out immediately with a small gain and reverse your position. If turns in your favor get out again and reverse your position again. 3. If it goes against you leave the trade alone until it eventually comes back. This would seem to me like a recipe for disaster independent of trading costs, slippage or anything else. (Oh and for good measure, continue to add to your position if the trade goes against you and don't get out until everything is at breakeven)
That's rather easy. You can simply ask him to go find an edge and follow it. He will be sure to lose it all. Should he not have an edge, he would end up with an exactly same result. On the other hand if he bets with a 500 point stop and when the stop is hit he loses 50 cents, it's close to impossible to bust his account. Therein is a clue, and trading and risk is completely controllable. As you already know, a small loss can turn into a huge loss. Likewise a small win can turn into a huge win. To win and win big does not necessarily involve great risks.