Below are the input parameters:
1) direction – BUY / SELL. The direction which you want to trade in
2) entryPrice – The price to enter the initial trade
3) finalStopLossPrice – The price to close all the trades in loss. This is the risk portion of your trade. Instead of setting this as your normal stop loss price, set this price a few support/resistance level away from current price. This is the final price which you think will not be reached without a significant pullback in the direction of your trade. As long as price pulls back before touching this final stop loss price, you will end up with a profitable trade.
There is a trade off in setting the price far from your entry price. The further the price is from your entry price, the smaller your eventual profit will be. This is because the program will automatically reduce the size of your trades within your reward:risk level.
4) numPipsTakeProfit – The number of pips to take profit on your trade. This is the reward portion of your trade. If the trade moves this number of pips above any of the entries anytime within the course of the trade, the trade will be closed at a profit. By setting a small number of pips to take profit, the probability of the trade winning is high. The trade off is your profit will be smaller as the program will automatically reduce the size of your trades within your reward:risk level.
5) numLevels – The maximum number of times the program will enter the market. By increasing the number of entries to the market, the probability of the trade winning increases. The trade off is your profit will be smaller.
6) percentageAccountRisked – The percentage amount of your account value which you will risk for the trade. The higher the percentage risked, the higher your profit will be. We advocate setting this value between 5-30% of your account.
Trade Example 1 (Reward Risk Ratio: ~1)
In this example, we want to 1) SELL the market at an 2) entryPrice of 1.4500 with a 3) finalStopLossPrice of 1.4710.
We set the 4) numPipsTakeProfit (reward) at 67 and the 5) numLevels at 3. This gives an initial reward:risk ratio which is close to 1. (67:71) Risk of 71 pips is calculated by the program based on the finalStopLossPrice and numLevels.
The percentAccountRisked is set at 20%. In this example, the account size is $100,000, thus with 20% account risked, $20,000 is at risk in this trade. (Total loss will not exceed this amount)
1. Initial Entry: 3.85 units is sold at 1.45
2. 2nd Entry: Price goes up 71 pips to 1.4571 and instead of taking a loss, adds 4.08 more units, giving a total of 7.94 units. [Loss: 3.85 units x 71 pips = $2733.50] (assume 1 pip = $10)
3. 3rd Entry Price goes up 71 pips more to 1.4642, add 8.42 more units, giving a total of 16.36 units. [ Loss: (3.85 units x 142 pips) + (4.08 units x 71 pips) = $8370]
4. Take Profit: Price goes down to 1.4575 (last entry of 1.4642 – 0.0067). Close all 16.36 units for a profit of $2579.
Notice that you still make a profit even though your close price of 1.4575 is higher than your initial entry price of 1.4500.
Note also for this example that each additional re-entry doubles the total previous units traded. This is because the reward:risk ratio is ~1 in this example. For example 2 where the reward:risk ratio is higher, each additional re-entry adds a smaller percentage of the total previous units traded.
If you are observant, you should have also noticed that some of the prices are not nice round figures. These are adjustments made by the program to ensure that your trades are within the risk limit. Slight adjustments might also be made to the finalStopLossPrice to ensure profit/loss calculations are exact.
Trade Example 2 (Reward Risk Ratio: ~2)
In this example, we want to 1) BUY the market at an 2) entryPrice of 1.3300 with a 3) finalStopLossPrice of 1.3150.
We set the 4) numPipsTakeProfit (reward) at 100 and the 5) numLevels at 3. This gives an initial reward:risk ratio which is close to 2. (100:51) Risk of 51 pips is calculated by the program based on the finalStopLossPrice and numLevels.
The percentAccountRisked is set at 20%. In this example, the account size is $100,000, thus with 20% account risked, $20,000 is at risk in this trade. (Total loss will not exceed this amount)
1. Initial Entry: 8.18 units is bought at 1.3300
2. 2nd Entry: Price goes down 51 pips to 1.3249 and instead of taking a loss, adds 4.17 more units, giving a total of 12.36 units. [Loss: 8.18 units x 51 pips = $4171] (assume 1 pip = $10)
3. 3rd Entry Price goes down 51 pips more to 1.3198, add 6.3 more units, giving a total of 18.66 units. [ Loss: (8.18 units x 102 pips) + (4.17 units x 51 pips) = $10476]
4. Take Profit: Price goes up to 1.3298 (last entry of 1.3198 + 0.0100). Close all 18.66 units for a profit of $8180.
The profit in example 2 is also much higher than the profit in example 1. ($8180 versus $2579) This is because of the higher reward:risk ratio. By having a higher reward:risk ratio, the program will allow you to take on more risk thus resulting in a higher profit.
Note that in both examples given above, the close price is worse off compare to your entry price but you still make a profit!
Trade Example 3 (Loss)
Not all trades will end up in a profit. Occasionally price will move drastically against the trade. Example 3 shows a trade where we BUY the market and price goes down all the way. In this case, the trade is being stopped out. All positions are closed when the maximum risk allowed (percentAccountRisked) is reached.
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