If you have a trading system that utilizes a 100 pip target (TP) and 100 pip stop loss (SL), it should have a 50/50 chance of winning if trades are entered at random over time. It'd be like flipping a coin. The TP and SL would have to be adjusted since you are closer to the SL as soon as you enter a trade. But let's keep it simple theory for now.
If we enter a trade that is equidistant from the SL and TP then there should be a 50% chance of being correct. I will then assume that by actually looking at the general trend or market activities of a currency that we can give us a system that is more than 50% successful or at least 50% successful if my first assumption was incorrect.
The probabilities haven't come into play yet though. I'm asking now what are the chances of a 50% correct currency trading system having consecutive losers?
If I remember correctly from college we have a 50/50 chance on each trade to be right and wrong when we view them as independent events.
When we try to find the probability of having 5 losing trades in a row, however, the chance of that happening is then:
.5 X .5 X .5 X .5 X .5 = .03125 or 3.125%.
Doesn't happen too often, although still very possible.
If our trading system is successful 60% of the time due to our simple chart reading predictions then the chance of having 5 losers would be 40%^5th power.
.4 X .4 X .4 X .4 X .4 = .010124 or 1.0124%.
Still possible, although with some discretion we've effectively lowered the risk of losing 5 times in a row by a factor of 3.
The doubling down forex trading strategy when trading a 50% correct system.
After each losing trade, double up on the next trade to cover the losses of the losing trade when you win this one. With a SL and TP that give us equal gains versus losses, doubling up on the winners allows us to cover the losses on the losers and still profit on the winning trade. So it would make it seem as if you had never taken the bad trade at all.
Here are the probabilities of getting x amount of losers in a row in a 50% trading system:
2- .25 or 25%
3-.125 or 12.5%
4-.0625 or 6.25%
5- .03125 or 3.125%
6- .015625 or 1.5625%
7-.0078125 or .78125%
8- .00390625 or .390625%
9- .001953125 or .1953125%
10 - A really small number
Basically, this means out of 1000 forex trades you can expect to lose 9 times in a row 1.9 times. If your system hasn't provided enough profit after 1000 trades to survive that then you're having the wrong forex system.
Now let's see what doubling up would require. Our value is 1 for your typical lot size per trade.
To double up on consecutive losing trades to get to the next you would need to risk:
As you can see, lot size adds up very quickly and it would be very unwise to trade 1 mini lot on a typical trade unless you have very high leverage as well as a large forex trading account.
This type of system is not martingale because it doesn't require you continue to fight with a losing trade. It's not pyramiding because you're not adding to trades when you're winning. It's more of the opposite.
In fact it would be very unwise to trade with the pyramid strategy for winning trades, because as my numbers above show, the next consecutive winner, just like consecutive losers, is very unlikely and you're probably going to wipe away a lot of your profits when that losing trade hits.
Money management
The doubling down strategy. With a risk:reward of 1:1 the system is very possible to use if you use very strict money management and understand that in the beginning money will be coming slowly, but it will be coming consistently.
The strategy makes it seem as if there were no losing trades, remember?
This is a law of large numbers system that requires you to be in the game for the long haul and not to make a quick buck to buy holiday gifts.
Is doubling down is risky?
Doubling down is risky but does it mean someone with a $10,000 account can't institute this system when playing with pips valued at 1 cent and high leverage? They'd be able to afford to increase their lot size by 1028 times to make each pip worth $10.28. To get to 1028 their normal trading size would require 11 losing trades in a row. Imagine how unlikely that is.
Summary
The doubling down forex trading strategy is based on equal profits and losses and market randomness, however, the forex market is not random when we look at it in hindsight and know what tool to apply to see why it jumped 50 pips.
Was it crossing the RSI, breaking through a previous resistance area, hitting a bottom channel? What tools the market follows are not constant and in that I claim the market is random. Why was this month a 15 year high on gbp/usd? How did it break through every previous resistance level in the past 14 years to get where its at now?
That is exactly what my idea for the doubling system is about. I'm not here to predict every nook and cranny, retrace, peak, or valley. I'm trying to play the probable scenarios to bring in probable profits. Probability says a random, or even discretionary system is severely unlikely to lose 11 times in a row.
