I've noticed there seems to be some sort of a new fad going around these days. More and more, I'm hearing about these scalping systems that risk 2.5 points or so, to make 1. I think one of the reasons this new fad is so popular is due to the low value of the ES. The logic is, well, you're only risking $125.00. Think of it using a 10 lot on the ES ($1298.00 including commish) If you lose 3 trades in a row (which is very common) you're down $3894.00 right off the bat. And since you're only making $452.00 (including commish) on your winners, you're going to need to win on your next 8 trades just to get back to BE (actually you'll still be down $278.00) And, of course, the argument in favor is usually "It's proved itself in backtesting" or "I know a guy who does"
Very, very, VERY GOOD POINT!!! So many people trade like this these days... I mean, excuse me, but why is everybody just looking at "how much am I gonna risk?" - rather than "how much am I gonna win?" Seriously, it has been written and said everywhere that you should focus on what you risk rather than what you make. This, IMHO is B.S! You need to focus on both equally. It is simply defined by RRR or "Risk:Reward Ratio". It doesn't matter if your initial risk is only 1 point. If, given that, your likely reward is less than 3 (or even 2!!!) points, then you're looking at losing in the long run... You must have a (minimum) profit target on every trade. Then you have to calculate what you're gonna make vs what you're gonna risk. If your RRR is less than 3:1, you'd better be a supertrader, or you're in trouble. Less than 2:1 is definitely inacceptable. Better is 4:1 or more... Which can be difficult in futures... Therefore beginners shouldn't necessarily trade futures. Just my 5 cents... ~Scientist