I've had my brain on fire for the last 3 weeks over this problem, as I've started to see my gains in % terms for my bank and NOT in total pips, and it has changed my outlook, and goes against what I've been told to do in order to protect profit. So I'd like to explain my conundrum, and by doing so it would be great to get some thoughts on this, and at the very least, it might help clarify certain points with other traders.
What I've always been told is-scale out a predefined profit level-for me, it's the 1/1 ratio, so level 1 is 25 pips profit-I'm out by 1 lot.
Say my maximum risk is 25 pips (including spread), and this represents 1% of my account. Say my account is 100k. My risk is 1000. 1000/25 = £40 per point.
Here's where it gets complicated. Is it better to scale out with reduced lot size at different profit levels i.e. 3 lots=£13.33 each, or is it better to just stay in with the £40 per point?
By using percentages instead of pip counts, I've come to the conclusion that it's better to use just one lot and to stay in. You might not lock in profits as often as you like, but when you're in the right direction on a trade, because you're still fully leveraged in the trade, an increase of just 5 pips is worth 0.2%.
If you've scaled out, you're diluting your profit potential. For example, it's always nice to get one of those days when you make 100 points, but what does that really mean if you've scaled out?
If I have take profit points at 25/50/100 pips on 13.33 per point, then I've made :
25 pips = 33.25
50 pips = 666.5
100 pips = 1,333
Total = 2332.75 (2.3% of account)
If I had decided to take profit at 50 pips on the full lot size of £40, then I would have £2000 (2% of account)
So I would have made less at £40 per point BUT it is not a significant amount less.
And the second important point is-how many times can I really expect the price to go 100 pips?
For an intraday system that I use, that's a fairly big move to have managed to stay in without prices retracing/playing around for hours, and it would most likely need the US session (I trade the London session primarily) to go my way as well, which is by no means guaranteed.
If I hit 25 points, with just one lot at £40, I have made 1% profit-a 1/1 risk reward scenario. IF I STAY IN, then the price doesn't have to go too far in my direction for me to start making serious profit. If it gets to 40 points, then I've made a 1.6% profit. 50 points then I'm at 2%.
But if I've scaled out, then these profits are MASSIVELY diluted, and I need the price to go a lot further for me to reach similar profit levels, and the probability of this happening is a lot less due to the levels that need to be reached.
I have no idea if I've explained that clearly, I hope that I have, and I hope to get some debate on the subject.
I'm aware that it obviously doesn't involve price retracing etc, but really, if all I have to do is hit 40 points for 1.6 % profit by not scaling out, then surely the answer is simple or have i got this arse backwards?
Eur/USD today is a good example, I was in for 2 lots-took profit at 23.8 pips and 44.1 pips. Assuming my maximum risk and bank size, profits=
1st lot = 476 profit
2nd lot= 882 profit
Total = 1358
Or if I just waited for 35 pips with one full lot, I would have made £1400.
And price going 35 pips is more likely than it going 50+.
Btw, yes my profit targets were a bit lower than 1/1 ratio, the speed of the movement took me by surprise
What I've always been told is-scale out a predefined profit level-for me, it's the 1/1 ratio, so level 1 is 25 pips profit-I'm out by 1 lot.
Say my maximum risk is 25 pips (including spread), and this represents 1% of my account. Say my account is 100k. My risk is 1000. 1000/25 = £40 per point.
Here's where it gets complicated. Is it better to scale out with reduced lot size at different profit levels i.e. 3 lots=£13.33 each, or is it better to just stay in with the £40 per point?
By using percentages instead of pip counts, I've come to the conclusion that it's better to use just one lot and to stay in. You might not lock in profits as often as you like, but when you're in the right direction on a trade, because you're still fully leveraged in the trade, an increase of just 5 pips is worth 0.2%.
If you've scaled out, you're diluting your profit potential. For example, it's always nice to get one of those days when you make 100 points, but what does that really mean if you've scaled out?
If I have take profit points at 25/50/100 pips on 13.33 per point, then I've made :
25 pips = 33.25
50 pips = 666.5
100 pips = 1,333
Total = 2332.75 (2.3% of account)
If I had decided to take profit at 50 pips on the full lot size of £40, then I would have £2000 (2% of account)
So I would have made less at £40 per point BUT it is not a significant amount less.
And the second important point is-how many times can I really expect the price to go 100 pips?
For an intraday system that I use, that's a fairly big move to have managed to stay in without prices retracing/playing around for hours, and it would most likely need the US session (I trade the London session primarily) to go my way as well, which is by no means guaranteed.
If I hit 25 points, with just one lot at £40, I have made 1% profit-a 1/1 risk reward scenario. IF I STAY IN, then the price doesn't have to go too far in my direction for me to start making serious profit. If it gets to 40 points, then I've made a 1.6% profit. 50 points then I'm at 2%.
But if I've scaled out, then these profits are MASSIVELY diluted, and I need the price to go a lot further for me to reach similar profit levels, and the probability of this happening is a lot less due to the levels that need to be reached.
I have no idea if I've explained that clearly, I hope that I have, and I hope to get some debate on the subject.
I'm aware that it obviously doesn't involve price retracing etc, but really, if all I have to do is hit 40 points for 1.6 % profit by not scaling out, then surely the answer is simple or have i got this arse backwards?
Eur/USD today is a good example, I was in for 2 lots-took profit at 23.8 pips and 44.1 pips. Assuming my maximum risk and bank size, profits=
1st lot = 476 profit
2nd lot= 882 profit
Total = 1358
Or if I just waited for 35 pips with one full lot, I would have made £1400.
And price going 35 pips is more likely than it going 50+.
Btw, yes my profit targets were a bit lower than 1/1 ratio, the speed of the movement took me by surprise