quick question re: R/R ratio

hi guys,

its only my second post as im new to this and am keen to learn!

i have a simple question, im thinking of trading currency pairs and i wanted some advice regarding the risk/reward ratios.

im using tradefair as a spread betting provider and i note that to trade EUR/USD, they have a spread of 1 pip and a minimum stop of 6 pips, so heres my question:

when working out positive expectancy trades on a favourable ratio, i've read on here that 3:1 or maybe 2:1, that is risking 1 unit for potential of 2-3 units is a decent R/R. however, since i am using a spread betting company, on a 2:1 R/R would it be spread + stop loss taken as 1? or just the spread?

if thats not clear, lemme highlight an example.

lets say i trade £1/pt on EUR/USD, if i were to jus use the £1, i would be placing a trade with the expecation of winning 2-3 pips then im out. or would i be adding the 6 pip stop loss on top, (total £7 risk) and expecting the trade to deliver 14 pips before i deem it a viable R/R?

sorry if this seems like a total idiot question, but i would like to get this correct from the beginning!

thanks in advance for any advice!

If you place a £1 per point trade long at price 1.2999/1.3000 for example, you will have entered at 1.3000, but immediately you are down 1 point, because if you want to exit you have to sell at price 1.2999.

So your stop is not 1 point there, or you would be immediately stopped out. So you have bought at 1.3000, and if you have a stop 5 pips away at 1.2995, then if price gets to 1.2995/1.2996 then you will be stopped out. So, that's a 5 pip stop, and if you want 10 pip target for 1:2 risk-reward, you would want to exit when price gets to 1.3010/1.3011.

5 pips is a VERY tight stop. And you would need exceptional entries to be able to work with that.

munchiedude said:

, (total £7 risk) and expecting the trade to deliver 14 pips before i deem it a viable R/R?

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yep , anyway r:r ratio isnt everythig , ie : u can make money even with a (1profit:3 loss ) ratio if u have a 80 % winning rate ...

Shakone said:

If you place a £1 per point trade long at price 1.2999/1.3000 for example, you will have entered at 1.3000, but immediately you are down 1 point, because if you want to exit you have to sell at price 1.2999.

So your stop is not 1 point there, or you would be immediately stopped out. So you have bought at 1.3000, and if you have a stop 5 pips away at 1.2995, then if price gets to 1.2995/1.2996 then you will be stopped out. So, that's a 5 pip stop, and if you want 10 pip target for 1:2 risk-reward, you would want to exit when price gets to 1.3010/1.3011.

5 pips is a VERY tight stop. And you would need exceptional entries to be able to work with that.

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thank you for your very prompt reply, i read it with great interest! in the spread bet platform i use, they have a 1 point spread and a 6 point minimum stop loss, so by entering the trade, i am 1 point down already but if the trade moves against me 6 more points then i am stopped out assuming i use the default minimum. In reality, i'm looking to set my stop loss appropriately for the volatility of the particular currency pair and trade accordingly.
given that my total potential loss exposure in the trade assuming i trade with a 1 point spread and the minimum 6 point stop loss is £7 so assuming a 2:1 risk reward ratio, would i look to only enter trades that have a high probability of delivering 14 pips or more? i.e. risking £7 to win £14?

i agree with you tar in the fact that R/R isnt everything and that winrate is equally as important. i am however, very mindful of striking the right balance between R/R and winrate as i know most traders lose money and i want to have a solid plan to start and improve it later as required.

with the 2:1 R/R, i figure that if i make 1 win for every 2, assuming i stick to target of 14 pips and no more or less, then i break even (lose £7 twice and win £14 once) and if i do better then i should be consistent.

incidentally, i see a lot of similarities between trading and poker, and i've got myself to becoming a consistently profitable poker player and definitely would appreciate the advice from your good selves to replicate that in trading!

add 1 pip to your loss, take 1 pip away from your gain

I would always suggest a 1:3 risk/reward - worked well for me over the years

its all meaningless, i can create a 1000/1 r/r trade but win rate is just as important.
for some reason people seem to think a low r/r is bad , even though it has a high win rate, and people think a high r/r is bad too cos its 'too close', the win rate is lower but gains bigger so its about getting a balance

Chartsy said:

its all meaningless, i can create a 1000/1 r/r trade but win rate is just as important.
for some reason people seem to think a low r/r is bad , even though it has a high win rate, and people think a high r/r is bad too cos its 'too close', the win rate is lower but gains bigger so its about getting a balance

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Complete agree the win rate is important but pointless risking say 100 pips to win 20.

OpesInvestments said:

Complete agree the win rate is important but pointless risking say 100 pips to win 20.

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it depends

thanks for all the advice so far, from the feedback i'e been getting, i'll assume that the true value of risk is the spread + stop loss? the example of EUR/USD that i gave earlier would assume risk capital would be 1 (spread) + stop loss (minimum 6 but i would be varying a mch wider spread) so totaling £7?
im assuming thats correct? if i use 3:1 as advised, then i would require a high prob 21 pip+ opportunity to enter that trade?

i know this is all variable and nothing in the real world is as simple as 3:1 as winrate would have to be taken into account but i'm just trying to put down some basic foundations atm.

what charts/indicators/techniques do you guys use when considering entry points and exit points?

munchiedude said:

what charts/indicators/techniques do you guys use when considering entry points and exit points?

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thanks - sorry for sounding like a noob