Risk / Reward

Hi Everyone

This question/Statement might be dumb but it is what I have observed in my very brief (and highly volatile!) Forex Trading career (When I say career, What I really should say is Forex Trading Flutter!)

I am a newbie to Forex and have NO idea of what I am doing

According to everything I have read and researched, one should not really place a trade where the Risk Reward Ratio is not in your favour (I seem to recall that you ideally want to make twice as much as you are prepared to lose but am not sure if it should be more (or less?))

However, As stated earlier, I do not have a Strategy I work to (I do have a plan but that's different to an actual trading strategy), I just don't know where to begin with one! But I do receive daily signals from a company that seem to know their onions (so far their "tips" have been profitable)

The one thing I have noticed though is that every trade they "suggest" has a greater Loss value than Win? It is quite often the case that on an actual deal, the pip profit is say 105 whereas the pips loss is 286 (these are just two figures I have pulled from the hat but I'm sure you get my drift)

Is this normal? It goes against every bit of advise that I have read but as I said, their "system" seems to work in the real world.

Any thoughts would be greatly received.

Thanks

Carl

carlgreen said:

Hi Everyone

According to everything I have read and researched, one should not really place a trade where the Risk Reward Ratio is not in your favour (I seem to recall that you ideally want to make twice as much as you are prepared to lose but am not sure if it should be more (or less?))

The one thing I have noticed though is that every trade they "suggest" has a greater Loss value than Win? It is quite often the case that on an actual deal, the pip profit is say 105 whereas the pips loss is 286 (these are just two figures I have pulled from the hat but I'm sure you get my drift)

Click to expand...

Do a search and take a closer look at the concept of EXPECTANCY, you cant really reach any sensible conclusons unless you know both the probability of a win or loss occurring, and the average size of those wins and losses.

Signals services (or the unscrupulous ones at least) often use this trick of applying a large stop loss, and taking samll gains. This ensures that they have a high number of winning trades (for fun you could take the oposite trade in a second demo account and see if the results after a couple of months are considerably different, that should tell you if the signals service has an edge)

I guess the problem with signals services is that you dont really understand what market behaviour theyre trying to exploit, so its difficult to determine if the stops and targets that theyre suggesting are meaningful or sensible (although looking at a chart often helps )

Its probably worth demo trading the signals for a while just to get some exposure to the charts, but eventually, you'll have to derive a strategy, and it can often take a while until you start to understand what sort of strategies suit your temprement, how often you want to trade, how much time you have available, your attitude to risk etc. Its worth spending time thinking through these sorts of issues, quite a few sites have trading plan templates that members have produced (IIRC the member TIMSK ? here at T2W has a particularly good one you might want to look at)

good luck with it all, and hope the signals continue to be profitable for you until you can start to get a better grip on things

I personally wouldn't be comfortable trading anything with a whopping 286 point stop loss. It sounds kinda scary to me... what happens if you have 2 or 3 losses in a row?!

Zupcon gives some very good advice above, i agree with him entirely.

Just be careful if you are actually trading this- be sure your account can withstand a 'bad' scenario of a few losses.

Thanks for both the replies, I particularly like the idea of trading the opposite in a demo account!

UKTradergirl, I'm OK with the big stop losses (cause whatever way you look at it, in my case I am only ever prepared to risk 3% of my capital on a deal, and I am geared up enough to stand a considerable amount of losses before I get wiped out! which will inevitable happen at some point!)

My biggest problem at the moment is exactly as Zupcon says...."I guess the problem with signals services is that you don't really understand what market behaviour they're trying to exploit, so its difficult to determine if the stops and targets that they're suggesting are meaningful or sensible"

I have looked at several systems on here and elsewhere and my biggest issue is finding one simple enough for me to understand and adapt (I do like the 3 ducks system as it seems to be fairly straightforward, but don't know enough to refine it at present)

Thanks for the advice though, It's nice to know there are genuine people out there prepared to offer something for nothing (a rare commodity in this day and age!)
(BTW 286 was a made up figure, the actual biggest numbers were 369 loss and a potential 261 profit on one particular deal!)

Thanks again

Carl

One of the problems with trading signals is that there is a lag on breakout trades.. By the time you actually enter the trade they recommend, the price has already gone where it is going to go.. It's a really good way for a trade to blow up in your face.

There's nothing wrong with big stop losses on weekly or monthly trades but 369/261 sounds a bit silly. There's no point in even being in that trade. Why didn't they pick up the trade when it was closer to the top or bottom of the range?? They're putting you at extreme risk for minimal gain and that's not a good trade.

I like to get the signals from a large 4 letter broker who shall remain nameless just to see if they are on to something I may have overlooked. I would never directly follow their lazy trading techniques however. They will let a trade get 800 pips positive and then let it come back to 300 pips or less without ever taking profit.. This leads me to believe that humans aren't involved in the trades and that they are generated based on sentiment and indicators. Only lazy fools and poorly designed robotraders would allow an 800 pip winner to turn into a 300 pip winner. A cluefull human trader would take the profit and re-enter the trade at the 300 pip mark.

You won't learn anything by relying on signal services, unless they provide you with the reasons behind the signals so you can reverse engineer. Nor will you learn how to position size to maximise expectancy.

I would rather lose little and *often, than lose big and **infrequently.

*you should reduce the loss rate with time.
**a string of losses will smash your a/c.

UKtradergirl said:

I personally wouldn't be comfortable trading anything with a whopping 286 point stop loss. It sounds kinda scary to me... what happens if you have 2 or 3 losses in a row?!

Click to expand...

What if risking 286 pips puts you in a position to make 1000? Does that sound better?

The pips really don't matter. It's how much money you risk. If each trade is only 1-2% despite the large pip exposure (meaning smaller trade size) then 2 or 3 losses in a row (or 5 or 10) is still only a small drawdown.