This is how I see it ... think of it as a ratio.
That was exactly the point I was driving at originally. It doesn't matter if it's stocks, FOREX, or pork bellies. This makes sense only if you look at in percentage terms, not in absolute dollar terms. You're going to tell a guy who's average trade is a million dollars that he should move his stop losses from $100 to $500? LOL, he's going to say, "ummm.. my average stop loss is like $5000 so what in the world are you talking about?"
But now lets look at whether their claim makes sense on its face, even using their numbers. They say if I move my stop from $100 to $500 then my accuracy will increase from 20% to 50%. OK, that means that before I took their advice I was losing on 8 out of 10 trades, but now I'll only be losing on 5 out of 10 right? Let's see how that works out for me:
My average losses on 10 trades before they came along:
(8 losses) x ($100/loss) = $800 on every 10 trades
My average losses on 10 trades after I took their advice:
(only 5 losses) x ($500/loss) = $2500 on every 10 trades
Hmmmm. I'm not sure I like having this extra $1700 loss on every ten trades. I hope my profits on the other trades will make up for it. They say that they will, but again there's nothing in there about where these extra profits are coming from.
Before I would have only had 2 profitable trades, and this would have had to make up for my $800 loss, so I needed a profit of $400/trade on my two wins to break even.
Under their advice, I would now have 5 profitable trades, but those trades would have to make up for $2500 in losses. That means I now need an average profit of $500/trade on my 5 wins to break even.
So here's how a conclusion would sound if they actually had real geeks coming up with their numbers:
If an increase in the risk per trade by a factor of 5 results in an increase in accuracy from 20% to 50%, then the profit per win must increase by 20% in order for the trader to break even.
I assume they're selling something? My overall point is that many companies try to take advantage of the fact that most of our population is innumerate by confusing them with a bunch of numbers that sound scientific. Be careful and try to develop a good BS meter for stuff like that. One of the things that sets my BS antenna off is when someone doesn't know when it's appropriate to use percentages vs. absolute dollars. That's what caught my eye about that chart.
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