Risk Reward ratio ?

mike.

Senior member
2,099 706
Just wondering, How many trade on a 1:1 ratio, I know its bad money management, but, forex seems to trade within a range rather than trend.

Looking back over a few trades i made, ( intraday ) i was stopped out, but soon after, the short term trend went in my favour and would have hit my t/p.( Ok, one may argue that it was a bad entry)

But, if i was to increase my stop loss and keep a realistic target you are moving towards a 1:1 R/R ratio. Thoughts please..
 

timsk

Legendary member
7,379 2,166
But, if i was to increase my stop loss and keep a realistic target you are moving towards a 1:1 R/R ratio. Thoughts please..
Hi Mike,
The holy grail in trading is to have a very high success ratio and, at the same time, a very high profit ratio. Generally speaking, if you improve one ratio, you do so at the expense of the other. IMO, risking 10 ticks / pips to make 10 ticks / pips is fine so long as you have a consistently good success ratio. After spreads, commissions and other costs, I'll wager that you'll need to be right at least 60% of the time to make a net profit. Drop below this and you'll be in break even territory at best. I've not seen any studies on this but, reading the forums, my impression is that retail traders generally favour a high success ratio at the expense of profit ratio, whereas, hedge fund managers and the like are prepared to endure a low success ratio knowing that the few trades that win do so big time and produce huge profits. Psychologically, that's easier to do when trading other people's money - not so easy when it's your own hard earned pennies.
Tim.
 

neil

Legendary member
5,167 747
Hi Mike,
The holy grail in trading is to have a very high success ratio and, at the same time, a very high profit ratio. Generally speaking, if you improve one ratio, you do so at the expense of the other. IMO, risking 10 ticks / pips to make 10 ticks / pips is fine so long as you have a consistently good success ratio. After spreads, commissions and other costs, I'll wager that you'll need to be right at least 60% of the time to make a net profit. Drop below this and you'll be in break even territory at best. I've not seen any studies on this but, reading the forums, my impression is that retail traders generally favour a high success ratio at the expense of profit ratio, whereas, hedge fund managers and the like are prepared to endure a low success ratio knowing that the few trades that win do so big time and produce huge profits. Psychologically, that's easier to do when trading other people's money - not so easy when it's your own hard earned pennies.
Tim.

Excellent post Tim(y)
 

mike.

Senior member
2,099 706
Thanks Tim, a brief explanation of my scenario is, At least three trades i made, target 40 pips, s/l 20 pips were stopped/spiked out, all three hit my target soon after, if i was to increase my target by 10 pips ( 50 pips) two would not of been hit ( intraday ) yet, if i increased my stop to 40 pips on a 1:1 ratio all three trades would have been profitable giving 120 pips less the spread.
 

neil

Legendary member
5,167 747
Thanks Tim, a brief explanation of my scenario is, At least three trades i made, target 40 pips, s/l 20 pips were stopped/spiked out, all three hit my target soon after, if i was to increase my target by 10 pips ( 50 pips) two would not of been hit ( intraday ) yet, if i increased my stop to 40 pips on a 1:1 ratio all three trades would have been profitable giving 120 pips less the spread.

Mike -can you demo alternatives for a space of time to get an idea of the reality of each approach over a statistically meaningful number of trades. That way you would know if you have an edge which helps with the psychology bit.Just to complicate things a little, it's not only your stops that you need to monitor but also your trading approach or method.
And thanks for posting an interesting topic as a relief from the growing amount of dross one has to wade through these days(y)
 

mike.

Senior member
2,099 706
Yes, maybe a good idea Neil to demo it for a while using same stake,target and s/l levels, see what returns I get (y)
 

timsk

Legendary member
7,379 2,166
Hi Mike,
Question: is your stop loss fixed at the same number of pips for every trade? If the answer to that is yes, have you investigated using a dynamic stop - the position of which is dictated by the market - usually key price levels? So, you might have a tight stop with a large position size on one trade, followed by a trade with a wide stop and smaller size. If you're not clear what I'm asking - let me know and I'll explain more fully.
Tim.
 

mike.

Senior member
2,099 706
Ahh, you might of hit the head on the nail there, yes, just with my strat that i developed or should say am using i do have a fixed amount of pips for a s/l and target, 20 stop and 40 target on major pairs, I just thought not to be to greedy and just stick to the strategy, but i suppose some pairs are slightly more volatile than others or all can be at certain times, maybe its time to set s/l at supp and res levels.
 

Profitsniper007

Active member
107 2
Ahh, you might of hit the head on the nail there, yes, just with my strat that i developed or should say am using i do have a fixed amount of pips for a s/l and target, 20 stop and 40 target on major pairs, I just thought not to be to greedy and just stick to the strategy, but i suppose some pairs are slightly more volatile than others or all can be at certain times, maybe its time to set s/l at supp and res levels.

Yes, using a # of pips as a stop/profit is not really accounting for what the market is doing - I think you need to take these from the charts rather than a pre determined figure.

Another possible solution (and this really depends on how you pick your trades) may be just to be willing to miss more trades and look for better spots to get in.

Very often the market will look like it's going to reverse and then hammer those who got in early, only to then make the reversal move shortly after (few candles after)

I just grabbed the first chart that was open when I opened MT4 and took some examples on if you were looking to trade on candles that looked like they may be reversals - whether or not these were good reversal candles signals or not is subjective and obviously everything is easy in hindsight, but hopefully it illustrates how this happens and you can do some back testing yourself if you think it may be useful.

From left to right;

Engulfing candle, price falls and buyers get hammered, then the actual move happens.

Doji style candle, sellers get hammered and then the move happens.

Engulfing candle - buyers get hammered, second time buyers get hammered as well, but it did try to do it, weight of the market was just too much.

On the blue circle area, you are missing that trade if you wait for the buyers to get hammered.

Whether or not the shadow on this candle was big enough to signify a possible reversal is very debatable, but if people took it, they got hammered, then the move happened.

Hammer, sellers get hammered, then the move maybe happens. I have not checked the smaller charts but I would think that the move was up and then rejected and went down to make a new low.

On this particular chart, you would have only missed one move, but I am not saying this is representative, just so happened this chart was a very good example. (and again, this is with hindsight, some of these trades you would not have known that the second move was about to happen, was no real signals, except breakouts)

I think being willing to miss more trades and look for this happening would be better than widening your stop loss and reducing your risk/reward ratio - trading 1:1 is very difficult to be profitable over the years, if you can, you are very good at picking when to trade.
 

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alexaherself

Established member
560 149
How many trade on a 1:1 ratio

I do for one of my methods. Historically, it has about 60% wins and 40% losses between 20 and 25 pips per trade, so even though it can have a losing month, it's profitable enough, overall, for me to continue it.

My main trading has an average reward/risk of about 2.5/1, though.

I know its bad money management

I take the view that it isn't, necessarily, if the proportion of winning trades is high enough to give it a genuine overall edge against the market.
 

Profitsniper007

Active member
107 2
I take the view that it isn't, necessarily, if the proportion of winning trades is high enough to give it a genuine overall edge against the market

I agree, you do have to be very disciplined and picking strong set ups though. Gartley patterns are always the example I use.
 
 
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