Newbie risk reward ratio question

[tymen1]

Originally Posted by zoreli

Here is my problem: I am trying to follow the trend on base on candlestick chart, and I would like to exit after 10 pips. However, if I place 10 pips stop loss, I am loosing more than I am winning.

From the other side, if I keep the position open, there is a chance that market can turn against me, and I will have even more loosing trades. Is 10 pips too little?

Regards, Zoreli

I can see nothing wrong with you trying to exit after 10 pips.

There is a way to turn this into a winning strategy. Please read the following hyperlink :

Using Multiple Lot Positions To Improve Trading FX

Yes, the market can turn against you!
How do we handle such matters?

I would like to strongly recommend that you go thro and read my thread in which I deal with the matter of risk/reward ratios in great detail.

The thread is some 45 pages long now and is the greatest teaching thread on this forum at the moment with more viewers that just about all the other threads.

I believe you will benefit greatly.

Here is the thread - just click on it.

THE JOY OF CANDLESTICK TRADING - a Learning Experience

[zoreli]

Thanks to all of you who post your advices here. I think that this post can be helpful for other beginners also.

I appreciate your help.

Regards, Zoreli

[4xStar]

Originally Posted by tymen1

The thread is some 45 pages long now and is the greatest teaching thread on this forum at the moment with more viewers that just about all the other threads.

I believe you will benefit greatly.

Here is the thread - just click on it.

THE JOY OF CANDLESTICK TRADING - a Learning Experience

Hi tymen, glad you reminded me .. I was planning on reading your candlestick thread from start to finish so today is the day I start. I also believe candlesticks may be the single most powerful indicator for forex (even more than for stocks). You could make a good living just having the patience to trade 3 candlestick patterns

[rhodytrader]

Originally Posted by 4xStar

Rhody, I'm talking to an absolute beginner .. you have to think back to when everything was new...

4xStar, I deal with new traders every single day. I am thinking about what they are thinking. You have to be very clear when you make statements because if you don't you can cause confusion very, very easily. I see it all the time.

And your 1 reason to enter a trade is actually a whole series of reasons because your setup consists (I would assume) of more elements than just the shape of one candle, or the direction of one ma.

What you are talking about is criteria. Criteria are not necessarily reasons unto themselves. The only reason to do a trade is that all your criteria line up.

Of course you wouldn't take a trade that is not valid .. but that is how an experienced person thinks.

And we are trying to teach that to new traders - not let them develop bad habits like putting on trades that don't fulfill the requirements of their system/method.

For someone who is brand new, I am just trying to keep it really really simple.

It's very simple. 1) Have a tested system/method you can confidently and consistently trade before you trade for real. 2) Only take the trades your system/method tells you to take in the manner in which it indicates. That's it.

Scaling out of a multi-unit position isn't necessarily a simple thing. Neither is scaling in. Both approaches should be tested in relation to one's trading system/method before being used.

[kangi]

zoreli

I scanned the thread for what first popped into my mind when you asked if 10 pip was too tight of a stop loss i havent seen anyone bring this up if they did ignore this....

But if the pair has a 5 pip spread, are you aware a 5 pip swing after entry your down 10 pips... this is the probelm with running too tight of a stop loss, the spread becomes a huge factor in your risk reward senerio's

so if you was shooting for say 20 up and 10 down for a 2 to 1 reward/risk.
it would actually turn out to be 20 up and 5 down since half your stop loss is eaten up by spread.

[tonymand]

The only logical place to put a stop is where you define the point at which you are clear your trade idea is wrong. How much you are prepared to lose in dollar terms depends on many factors which include the expectancy of your system and (more importantly) your psychological fortitude. This then is the basis of determining your trade size. Even after all that the trade still has to be worthwhile in terms of your expected profits. For all of these reasons there is no simple answer to how you construct your trading system. However in general if your stop is around 10 pips you are trying to trade nothing more than noise within the instrument and that doesnt to me seem likely to be a route to longevity in this business. Thats not to say that you cant have an approach that looks for very tight entry criteria. I trade sometimes the 78.6 fib retracement (look at Daedalus' thread for ideas with fibs) and this can give tight entries with technically relevant stops occasionally with multiple R payoffs. My final thought is that one has to be wary of beingtoo prescriptive or critical of anyones approach as there are limitless ways of being successful in this business (and perhaps more limitless ways of being unsuccessful!). This I think is the biggest problem for new traders. There is so much to learn, so little really known when we are dealing with uncertain outcomes and an overbundance of randomness and a tendency to think we know more than we actually do. As a result most washout before they have learnt anything of value

[4xStar]

Originally Posted by tonymand

The only logical place to put a stop is where you define the point at which you are clear your trade idea is wrong.

Well said, tony.

Recently I learned about something called a 'time stop' which means, as I understood it, that as the trade progresses, you keep raising your stop even if the trade is not yet moving in your direction. So for example you enter a trade, thinking to take profit at +25 and you set an 8 pip stop because that is the point at which your trade would no longer be valid (as you said above).
Now the trade progresses, but doesn't really move much .. one, two pips in your direction. Depending on your time frame, you let one or two candles close and then start tightening your stop. After maybe 4-5 candles your stop is now at breakeven or breakeven + spread, if you close you are maybe one pip in profit and your stop is now only 2 pips below your current price, obviously it can be hit any moment.
The idea is, if the trade is not progressing in a timely manner, the time stop will get you out with a tiny profit or minimal loss. But you will not be languishing in a trade that is just not going anywhere. Time to move on & look for another one.

Since learning about this, I have applied it several tiimes and I like the way it works. Prior, I would sometimes hold onto a trade for hours and it would eventually hit my initial stop, so I would lose 8 pips and many hours of trading time instead of 1 pip and a few minutes of trading time.

This is just another variation of what you were saying above .. the only logical place to put a stop is the point where you are clear the trade is no longer valid .. and you can factor time into this as well.

Anyone else use time-stops?

[dobro]

I traded commodities many years ago; was doing very well until copper made a U turn- it took 2 1/2 days before my SL was honored and wiped out my acct. Good lesson, 2 yrs experience and zero +or- $. But something always made sense to me that comm. traders swear by: don't take profits off the table! Rhody mentioned scaling in and this is my thought - when you take a position why not enter with a very small position and then if the trade keeps going your way add another lot. If it continues to go, keep adding lots and adjusting the SL.

I never see this discussed or used with any strategy - must be some error in my thinking; comments?

[rhodytrader]

Originally Posted by 4xStar

Recently I learned about something called a 'time stop' which means, as I understood it, that as the trade progresses, you keep raising your stop even if the trade is not yet moving in your direction.

While this might be a variation on the idea, the basic concept of a time stop is to exit if the market hasn't done what was anticipated within some predetermined period of time. This doesn't necessarily have to mean trailing a stop, and in fact that could potentially hinder performance (test it, as always).

A lot of traders use timestops in one fashion or another, even if it's something as simple as closing out one position that's doing nothing to open another which looks more attractive.

[kangi]

Dobro...

"Scaling in" on a winning position... is not a new concept, it is as old as the art of speculation is...

Check out "Reminiscences of a Stock Operator" Jesse Livermore talks about Always Scaling in a winning position in 1/5. And this was more than 100 years ago. ;o)