Are Big Trades The Best Trades?

July 31, 2019

Lately, there’s been a nagging thought in the back of my head.

What if the best trades are the ones with big profit targets?

Since I started developing robots back in 2012, I’ve always gravitated toward systems with small targets and high win percentages.

It seemed to me that the best way to trade-for-a-living was to try to get small wins every day.

If we get small wins every day, our account grows and we can pay the bills. Plus, we win a lot.

If, instead, we go for big wins, we’ll never know when the big trade is coming. What if there aren’t any trends this month? Does that mean I don’t pay my mortgage? How can anyone quit their job and become a trader if he/she is reliant on big wins?

At least, that’s what I thought.

But lately, it seems like the opposite might be true. One big win can change the course of a trader’s life. One big win can pay for months of bills in one fell swoop.

And big wins aren’t subject to everyday worries like small-target systems. Remember, if spreads or execution problems start affecting too many small wins, the live results can turn out a lot worse than expected.

Big wins are nice and calm. If we lose a point here and there, it’s no big deal. One big trade is still going to pay all the bills. It doesn’t matter if the spread took a few extra points.

For those reasons, I’ve been looking into systems that create big wins. I’d love to add a big-win element to my trading.

There is one problem, though, and it’s important.

What does a “big win” mean?

A trend follower would say that there is no limit on the big win. Just follow the trend until it ends and take what you get.

Here’s the thing about trend following, though: it’s very unpredictable. It can go a long time without producing anything. Because we don’t use targets in trend following, even the trends that go profitable can turn around and not be winners. The combination of stopouts and reversals can make for lengthy dry patches. And that’s not great for paying the bills.

Big wins are more reliable, though. We can have an expectation of how much a trend will bring us, and it won’t be so barren. We get a big win, and we get out without watching profits slowly erode as it hits our trailing stop.

But we still haven’t answer the question. How big is a “big win”?

In stocks, a big win could be a double. Or even a 5-bagger (stock quintuples in value). Stock trading comes with its own obstacles, of course. How do we find these big wins in the thousands of stocks available? Do we have to worry about pattern daytrading rules? And how big is big enough? Penny stocks can triple in a day. Apple can go 20x over a decade. Where do we draw the line? The “how big is big” question is a tough one in stocks.

In Futures, we definitely can get big wins. But we have an account-sizing problem in this arena. To trade regular contracts, we’d need $20-$50k to do it right and be able to survive drawdown.

Forex doesn’t have those problems. We can use any size account and only have a handful of instruments to choose from. So we’ll stick to Forex this week.

Forex, of course, isn’t a company or a commodity. It doesn’t go from 1 to 100 like a startup. It doesn’t triple in value in certain economic conditions like gold does. Forex is simply the relationship from one currency to another.

Because of that, we need a way to easily understand what a big win might mean.

To solve this problem, we’ll turn to Average True Range (ATR). If we know what the range of an instrument is, we can know what a big win really means.

For example, let’s use the USDJPY pair. Let’s say over the past year or so, the ATR of USDJPY has been 60 pips. That means that, normally, the USDJPY moves about 60 pips a day from high to low.

If it normally moves 60 pips, getting that entire movement would be a pretty big win. So a 60-pip target on USDJPY is a nice target.

If we wanted a “big win” then it’s reasonable to say that 2x the ATR would be extraordinary. If USDJPY has only moved 60 pips a day for a long time, if we get a 120-pip win then we’ve done something fantastic.

Furthermore, we know the limits of what we should ask of our instrument. Asking for 1,000 pips on an instrument that only moves 60 pips a day is asking a lot. It’s probably asking too much.

With the leverage available in Forex, it seems like going for 2x the average true range could give us the big wins we’re looking for. It offers a nice payoff and is reasonable enough that it might be repeatable.

In our next email, we’ll use this as our guide. We’ll take a system and go for big wins using the ATR as our guide. And later this week we’ll see how that compares to small targets.

If you’re interested in this topic, you can also check out my friend Rob’s new research on finding Monster Trades here.

Talk to you soon.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.