Does anyone trade with a 2:1 Risk/Reward ratio?

Hi guys,

After I reviewed my trades of the past months, I found out, that ~ 90% of my trades hit the 20 pip profit target. When realizing this, I started to trade this way and last three months were very profitable for me. Here is how February looks like so far and how it WOULD look like, if I were trading the “old” way (btw, I trade only EUR/USD and USD/CHF):

  1. If I would use a 40 pip pip-by-pip Trailing Stop Loss after entering my trades, I would end up with [B]20 pips[/B] in profit so far.
  2. If I would use a 40 pip pip-by-pip TSL’s and a 40 pip Profit Target, I would end up with [B]148 pips[/B] in profit so far.
  3. If I would use a a 40 pip pip-by-pip TSL’s and close my trades “manually”, I would en up with [B]188 pips[/B] in profit so far.
  4. And because I used 40 pip pip-by-pip TSL’s and I had a 20 pip PT, I ended up with [B]248 pips[/B] in profit.

Out of 15 trades, 14 were profitable, which is a 94% success rate. I trade from H4 and H1 TF’s only and I get about one or two trading signals each day (but not trading them all).

Anyway, I just wonder, if anyone else is trading like this and if this could be a viable long-term strategy? Trading this way I ended January with 240 pips in profit and December with 310 pips.

I am a bit confused, because almost no-one is promoting this style of trading and yet, it is by FAR the most efficient way for me.

The funny thing is, that when I started trading forex, I traded this way and found success quite fast. But then I started reading books/articles which promoted 1:2, 1:3 and higher risk reward ratios and started to trade that way. This is when my success rate dropped badly and profits were hard to made.

I also realize, that my theoretical break even point is at 67% success rate, the “true” BE probably at 70%, but chasing only 20 pips at a time is 85%+ of the time a successful endeavor. :slight_smile: And because I use pip-by-pip Trailing Stop Losses instead of fixed stop losses, my actual RR mostly drops from 2:1 to 1,5:1 or even 1:1.

I would much appreciate your thoughts on this kind of trading. Thanks!

H.

What would the result have been if you entered with a 20 pip trailing stop? Perhaps you could find a way to make entries that avoid the large part of the pullback?

However, if it ain’t broke, don’t fix it.

Agree!! I think, most of us discretionary trader will have our way of living. Err… Trading :smiley: so when you find your comfortable way, then be sure about it.
any way, if we ourself don’t trust our own method, then who will?
Even the best driver will at one time bump his car :smiley:

To answer that, you have to backtest it. And, unfortunately, you have to do it on your own. Backtest, especially manual one, is tedious if not gruelling task. And, at some point or another, you realize you have made some mistake—curve-fitting the result to suit your need—and have to do it all over again. Then again. Then again.

Would agree IDR, backtesting may have some mistakes or maybe not… your only TRUE test is forward testing. As of now, it has been doing fine… and if you are live I wouldn’t change a thing… for now.

How ever, you still need to forward your other methods. In demo, trade as if you were, but do it as many times as possible to all of your methods and make a journal so you can record it all. In about 3-4 months review your findings and then make your desicion. Doing so for 3-4 months you also get [I]some[/I] market variables

You may want to completely write out how you plan to trade EACH one and stick to your rules (the hardest part). And if you should close a trade outside of your plan note your reason why in great detail, this way you might learn a little bit about your psyc.

By changing it all now and really not know if it is the best for your trading style could be more damaging then good in the long run. Start slow and don’t base change out of greed/fear.

1 Like

Hi guys,

thanks for your answers. Well, yesterday I had a hard thought about it and decided, that I will adjust my TSL’s and PT’s according to market’s (EUR/USD & USD/CHF) volatility.

If the Daily ATR (set @ 21 - there are 21 trading days in a month) is at 200 pips, I use a 40 pip TSL and a 20 pip PT. If if falls bellow 150, I’ll use a 30 pip TSL and a 15 pip PT. If it goes below 100, I’ll have a 20 pip TSL and a 10 pip PT.

Basically, this is (almost) the same thing as the Nick B. (from Forex4Noobs) does. I divide the daily ATR with 5 to get my TSL and PT values.

I did some manual back testing yesterday and as far as I was able to tell - it would work just the same as it works now. I just need to follow [B]the trend[/B] and buy at TL’s and S&R’s. Nothing complicated. It already did produce some amazing months for me. I guess this is as close as ever to finding my “personal” holy grail.

Thanks again for your help!

Hi!

Thanks for your suggestion, I did try (with manual analysis of my trades) with 30 pip and 20 pip TSL’s, but it did not work as good as using 40 pip TSL. Currently, what really does work for me, is using 40 pip TSL’s and 20 pip PT’s.

It is very rare, that I get a full 40 pip blow, so the TSL lessens my Risk/Reward and also when I see an “obvious” failure (like price breaking my resistance level and then finding support there) I close the trade before the TSL does it for me. But this is also rare. My kind of trading is most of the time “set & forget” style. :slight_smile:

I have to agree also. I have been in the situation where I start to make profit.
Then start watching and thinking “if I did this I would make that”.

Then sure enough I play with my rules and start losing.

I have bashed myself into submission and have made consistent profits for the last couple of months.

Got my head out of the get rich now mentallity.

Like the tortoise and the hare. Slow and steady wins.

See, this is where I went wrong this week. Encouraged by my results, I decided to raise my risk % from 1 to 2. And boy did I pay my lessons in psychology! I had three consecutive losses… You know, I thought I’m the Master of the Universe now and I can’t even make mistakes anymore. But I was humbled quite fast.

It’s a few days off for me, then I’ll start again trading with 1% risk and gradually move to 1,5% and 2%. I just need to do what I was doing all along… But the greed cost me some nice money I could spent on lovely girls and alcohol. :slight_smile:

Extremely interesting results and information here. This is something that has been on my mind recently. Your 2:1 Risk/Reward ratio using a TSL and a PT has been the most successful strategy to date. Setting and forgetting is appealing if it’s (very) rare the pullback is greater than the TSL

Using the Daily ATR is a tool I have recently looked into. This is the first time I have come across another trader posting their strategy using the ATR, without doing any research. Thank you for posting, I have learnt something very valuable today that I will process and introduce into my trading method

I will subscribe to this thread and look forward to future postings. I may even post some results myself to share

Hi!

I’m glad you found it useful. After posting my messages I also found some “theoretical” research about this subject - you can find it here: Win 15-18 pips 80% of the time los 34 pips 20% of the time - MoneyTec.com Traders Community Forum

While I believe this to be a very solid strategy for a ranging market, I suspect it will be better to leave the RR on 1:1, when the markets start to trend again.

Btw, I am also observing the USD/JPY cross for some time and it’s quite surprising, how well the S&R and trendlines work. While my success rate trading EUR/USD and USD/CHF is satisfactory, it’s probably because I put quite a lot of work into analysing both pairs, since both are highly correlated. I entered my trades only when both pairs confirmed each others setups (both were near a significant TL or S&R).

Since (as far as I know) USD/JPY has no such obvious correlation with any other pair, I feel I can devote all my attention to this pair only. It’s also appealing, because based on this article (Currency Personalities Revisited : Experiences of a Forex Trader) it’s exactly what I like best.

Anyway, I wish you much success and it would be very nice to hear some of your experiences too.

Hello Hendrix-

I am glad that you have brought up this thread. See I have rarely if ever used a Risk:Reward of 1:1 or Lower. My Risk:Reward has always been higher than 1. I usually use 3:1 and sometimes even 5:1 Risk to reward ratios. I have a trading philosophy around not using s/ls but that is off topic and I will not delve into that. Briefly, I am discretionary in the sense that when I feel the price is "right"according to the historic support levels I will not use a Stop. And this was proven this past week.

Anyways, when the situation is “normal” just like you I only aim for 20 pips t/p and about 80-120 s/l. I have been profitable from December on. Before that I lost consistently for 3 months. This is in no way advice for anyone-I am profitable at such high risk:reward because I am able to spot these 20 pip trades with a very good accuracy. I also only trade E/U-and I have a leverage which is never (and I stress NEVER) more than 1:10. 9 times out of a 10 times I trade with a leverage of 1:2 -1:4

It is good to see one more soul who thinks profit can be made at a Risk:Reward higher than 1 :wink: But I also dont think 3 months is consistent. May be if we are still around here a year from now, we will have some good emprical data to prove it

Best!

Tex

My rrr is almost always 2:1, few times is 1:1 or 3:1, but what has worked for me is my frequency of winning. I win 9 of 10 trades. Even when I lost more than I intend to win in one trade, whit my other wins I’m still profitable. Personally I’ve found that putting a stop loss a little bit loose, let the market bounce and actually go in your direction. A tight stop loss has never worked for me because it can turn a winner trade into a loser one.

Just my newbie thoughts.

Regards.

Hi, Tex! Thanks for dropping by. :slight_smile:

It’s an interesting concept and I also found that a lot of my previous trades went in the right direction only AFTER I’ve been stopped out. However, my personal comfort zone is at 2:1 RR.

It’s a bit of a strange feeling and I confess that I would rather use a 1:1 or even higher (1:2) RR, but it just doesn’t work for me. As a matter of fact, I “tested” many different combinations based on my trades of the last three months and 2:1 always gave the best results. I’ve tried 30 pip TSL’s and 20 pip PT’s, then 40 pip TSL’s and 25 pip PT’s… And nothing worked as good as 2:1 RR.

I will try to post my results again in the end of March, but they could be mixed, since I will most probably stop trading EUR/USD and USD/CHF and move to USD/JPY. My TSL will be 30 pips and PT 15 pips (it is based on the Daily ATR). It is quite time consuming to analyse and to monitor 2 pairs simultaneously because of their 98%+ correlation. But I do believe that it helped me to achieve 94% accuracy (well, this week I’ve had a couple of bad trades because of my arrogance, which was inspired by my success. :slight_smile: I’m taking a few days off now).

Hi Wrtm!

Great! Then there’s even more of us. :slight_smile: And I really thought I’m doing something foolish because 99% of the MM articles shout at you that you need to use at least 1:2 Risk/Reward!

I’d also like to join in.

Of course R:R has to be put in relation to your win percentage.

Like others have said, if you have an edge allowing you to win say 8 out of 10 trades or more, naturally this allows those two losses to be bigger than your wins and still you’ll be in the green.

I mean, you could choose to use a tighter stop and get stopped out a lot giving fewer winning trades and higher wins on those, or allow more wiggle room resulting in more frequent wins and fewer but larger losses.

It’s about finding the best balancing point in that equation, isn’t it?

Yeah, I totally agree. Well, my win percentage went up as soon as I lowered RR and it is 80%+ for the last thee months (Dec., Jan. and Feb.). I am very excited because first time since I started trading forex I actually enjoy constant (well, if you can say that for a 3 month period) success.

Also, I guess that [B]Trailing Stop Loss[/B] helps a lot too, because it lowers the actual 2:1 RR. It is very, very rare that a position would not retrace at least just a little bit. If I trade (and I do) “obvious” S&R’s (on H1 and H4 TF’s) it almost never goes against me by full 40 pips. But when it did, it was basically because of my ignorance and impatience. And I wrote that down with [B]BIG RED LETTERS[/B]! =)

yeah i m in the same boat–if it works aint broke!!

I cannot disagree.

But here is what I suspect-we are only start ups, so there is a tantalizing feeling to getting 15 pips a time and risking about 30 pips on that. Some of us have gone good now and we catch a trend nicely and are good at entry so the retracements dont eat our 30 pip stops.

I do a lot of research on weekends as that is the only time I have for studying forex due to a day job–every week, every month I see possibilities to improve. So gradually the “strange” feeling you mentioned will go away too-right now at a 5K account I dont see anything wrong with a 2:1 risk:reward, but as the stakes grow, a 1:1 is desirable, may be a 1:2 really nice.

But right now I am well and happy with my techniques and the ratio that I have :slight_smile:

Best and trade well!

I guess the main thing is that we make profits, which is really cool, no matter how we (I) feel about using a 2:1 RR.

I also remember reading a very “educational” quote not long ago: [B]“If you have a good trading method, don’t ruin it by trying to make it a perfect trading method.”[/B]