Optimal levels of TakeProfit and StopLoss
This powerful calculator allows you to determine where to set the orders TakeProfit and StopLoss for maximum rapid increase of the trading account with leverage when you always trade with one and the same share of your account in each transaction, at a known ratio of profit and loss as a result of the execution of orders TakeProfit and StopLoss and at a known ratio of the number of profitable trades and unprofitable trades.
Suppose your trading system requires that orders TakeProfit and StopLoss have been set for each transaction so that there is a constant ratio of potential profit and potential loss of funds, which are used in the transaction (taking into account the brokerage commission). If you always trade a constant fraction of your current trading account, then there are some optimal values of the potential profit and potential loss of the traded share of the deposit, for which the value of all your trading account grows as quickly as possible.
For exact calculation it is necessary to know just what percentage of your transactions are profitable of all your transactions.
If the magnitudes of the potential profit and potential loss per trade is strongly high, it greatly increases the risks. In this situation, the risks are so big that from a certain level of loss for a single transaction, even a single operation of the order StopLoss may result in the loss of all of your trading account. And if the magnitudes of the potential profit and potential loss on each trade is very small, it reduces the risks. But this leads to a very slow growth of the size of the trading account.
Therefore, for a given fixed ratio of profits and losses of the setting of orders TakeProfit and StopLoss and for tht ratio of the quantity of profitable and losing transactions, there are optimal levels of TakeProfit and StopLoss, which provide maximum growth of your trading account with minimal risk. So, there are optimal levels of orders TakeProfit and StopLoss, which provide the best ratio between the growth of capital and risk at long stock market game. Of course, the positions of these levels depend essentially on the size of the share of current trading account that you use on each transaction, and on the size of your leverage.
This calculator of the best levels TakeProfit and StopLoss finds what should be the profit and loss for the share capital, which is used in each transaction, for leverage is 1:1. You need to set your orders TakeProfit and StopLoss as, if the leverage would be 1:1, although in reality, you can have another leverage. In other words, a recalculate of levels TakeProfit and StopLoss is not needed. This calculator gives the final result to suit your leverage.
Consider an example. Let for your trading system only 40% of all transactions are profitable, and the other 60% of all transactions are losses. Suppose your trading system is such that the execution of the order TakeProfit should make a profit to 4 times larger than the loss at execution the order StopLoss with the leverage of 1:1. Suppose you open a transaction each time with the share of 10% of the volume of the trading account, and your leverage is 1:100.
Then, the calculator calculates that the maximum increase of the size of the trading account will be, when the order TakeProfit is set so that it execution increases the your funds in the transaction by 10% (if liverage is 1:1). It is necessary to use this getting data directly, although your leverage is 1:100. The order StopLoss, of course, must be set so that, when it is executed, your funds involved in the transaction, would be reduced by 2.5% for leverage 1:1.
An incorrect installation of the orders TakeProfit and StopLoss may lead to a slower average growth of the volume of the trading account. This occurs both at the expense of slow growth when there are too small deviations of levels TakeProfit and StopLoss from the price of entry into the market, and due to very large losses trading account when there are very large deviations of levels TakeProfit and StopLoss in relation to the opening price of the position.
In the first case we have a small risk, but a small profitability. In the second case we have a very high profitability, but with a very great risk. In the second case, we can easily lose your entire trading account. Moreover this loss of the deposit will only be a matter of time. Although the trader may seem that the parameters of its strategy should lead to an increase of the volume of the trading account for a sufficiently long run.
Author: Eugene Mironov.