Sorry for the write errors, english is not my first language Your pockets wont be deep enough, no matter how you turn it. Even if you start with minimal bet size and only risk 100 USD on the first trade, the losses of the individual bets will look like this in a 20x losing streak: 100 200 400 800 1.600 3.200 6.400 12.800 25.600 51.200 102.400 204.800 409.600 819.200 1.638.400 3.276.800 6.553.600 13.107.200 26.214.400 52.428.800 And thats only the results of the individual bets, the cumulated losses will be almost 2x these numbers. And 20x losing streaks are absolutely nothing exotic in a 50-50 game (just ask the casinos). But in this case we are not talking about a 50-50 game, but a 75-25 game which makes it even worse regarding the losing streaks.
The 1:3 r:r almost certainly means you will never accumulate enough winners to outweigh the losers. If the ratio was 1:1, you would break even (ignoring trading costs): the market would need to have equivalent amounts of buying/selling ("energy" input if you like) to move +1R or -1R so you should get 50% of trades winners and 50% losers. Of course this is pointless as it makes no profit. But there must be some r:r at which the excess size of winners means a positive return, while the closeness of the risk to reward means both winners and losers are effectively as likely to result from market activity as the other. But I would bet the ratio will be extremely tight, say 1:1.1 or 1:1.2. Seems hardly worthwhile given the risk of wipe-out from strings of losers.
No, because prices are not normally distributed. They may be log-normally distributed in selected cases, but any chock to the data set will skew your model.
For ES, NQ and YM Daily data, I ran a simulation (5000 times) where 500 trades were randomly selected between 01/01/2000 and today. Here are the results without any commissions or slippage factored in. Where stop is Entry - (ATR * 1) and limit is Entry + (ATR * 3): 1070 out of 5000 runs had a positive result Where stop is Entry - (ATR * 2) and limit is Entry + (ATR * 6): 2238 out of 5000 runs had a positive result Clearly a loser.
A number of faulty assumptions: 1) stocks traded will always hit the targets, what happens when the stock reverses and drops? While, stocks may hit and even exceed the target price, that is not guaranteed! 2) assumes a utopian world where stop losses are hit and executed at the exact same price, what happens in a gap down or when the bid and asked spreads widen? This is similar to that chimp experiment where they had the chimp throw darts and they would trade which ever ticker the dart hit! In this example of yours, there is no risk management!
Yes that's the only thing with Martingale system; you need infinite amount of trading capital theoretically. But we are discussing the doability of this "simple formula" proposed by the OP so we will assume deep pockets is a given.
In the second scenario it is profitable right?? ..or am I missing something ... 2238 out of 5000 is 44% in 1 to 3 risk to reward would make a lot of money ATR is dynamic so tough to say may be better to test this with fixed stop loss and TP.
I believe he meant that out of 5000 runs of 500 trades, only 2238 were green, not that 2238 make 3R profit.