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I was listening to this youtube video and the author is explaining that good way is to set up forex trades in a way where 10 pips in 'losing' direction (Stop loss) and 20 pips in 'winning' direction (Profit Target) and then getting 50/50 win-loss you will come out on top since you gain more by winning and lose less by loosing.

However, to me, it feels counterintuitive IMHO to get x2 pips in wining direction is x2 as hard... so a ratio of win/lose in current setup would end up 33 wins / 67 losses...

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I must be missing something here. Is forex trading where winning pips are twice as far from the cut of is a good strategy?

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closed as off-topic by LocalVolatility, Chris Taylor, phdstudent, Attack68, Helin Oct 2 '18 at 2:35

This question appears to be off-topic. The users who voted to close gave this specific reason:

  • "Basic financial questions are off-topic as they are assumed to be common knowledge for those studying or working in the field of quantitative finance." – LocalVolatility, Chris Taylor, phdstudent, Attack68, Helin
If this question can be reworded to fit the rules in the help center, please edit the question.

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    $\begingroup$ Voting to close this question. It is too basic and not really about quantitative finance. $\endgroup$ – LocalVolatility Sep 30 '18 at 13:37
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    $\begingroup$ That's why there is a voting system. Question will only be closed if others agree with the assessment that it is a) too basic and/or b) not really about quant finance. Please avoid unnecessary discussion in the comments. $\endgroup$ – LocalVolatility Sep 30 '18 at 14:13
  • $\begingroup$ Agreed that this is not the type we’re looking for. Letting this open because it’s good that there are resources online that point out what is wrong what these kind of videos and strategies. $\endgroup$ – Bob Jansen Sep 30 '18 at 16:11
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If you have no edge, then you would indeed expect twice as many losing trades as winning trades, so you would net out to zero return on average (negative after commissions and trading frictions). This is a special case of the mathematical result known as the gambler’s ruin problem.

If markets are not random, but exhibit either short-term momentum or short-term reversion, then the advice is different.

The advice to set profit stops twice as far from the entry as stop losses is a form of “cut your losses short and let your winners run on”, or more succinctly “the trend is your friend”. If markets exhibit short-term momentum then past winners are more likely to continue winning and past losers are likely to continue losing. In this case, it makes sense to hang on to winners and cut losers quickly.

On the other hand, if markets exhibit short-term reversion then the reverse is true - you should take profits quickly and hold on to your losers, waiting for them to come back.

So whether you follow this advice should depend on whether you think markets have short-term momentum, short term reversion, or whether you think they are close to random walks (in which case you should not trade).

A more practical piece of advice is - the author of this video is wrong and you should not listen to them. Probably, you should not day trade forex at all. Most day traders lose money.

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  • $\begingroup$ Hi, Chris, I was looking for easy to digest trading video for my kids... just wanted a confirmation... Thanks for the answer. $\endgroup$ – Matas Vaitkevicius Sep 30 '18 at 12:03
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    $\begingroup$ A lot of retail FX Trading activity is encouraged by unscrupulous promoters cftc.gov/ConsumerProtection/FraudAwarenessPrevention/… It is important to be wary of these pitches. $\endgroup$ – noob2 Sep 30 '18 at 15:13

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