How risk:reward management can save your account!

Hi. I just wanna share something regarding risk : reward management as I feel it is one of the most important things you need to be disciplined at in order to save your account.

So far I have made 14 trades, of which 7 are loss trades and 7 are profit trades. On the surface, you might think that I should break even. But fortunately, I actually made overall profit!
What is the reason? As I said, RISK : REWARD management!! In every trade that I entered, I always keep in mind to only enter trades that have a minimum risk:reward ratio of 1:2. (Sometimes 1:2.5 or even 1:3)
As a result, even with a trading rate of 50% or even 40% profit rate, I can still cover the losses. On a layman term, with every 1 success trade, I can afford to make about 2 losing trade to break even.

I believe this is of utmost importance when deciding to enter a trade. Always make sure that the Take Profit margin is more than the Stop Loss. This way, even if you have more losing trades, chances are you are somehow insured from making more losses than you expected!! :smiley:

This is actually the key characteristic of trend following systems. You’ll notice that trend following systems will have a rather low percentage of winning trades (20-40%), but the reward to risk is quite high 2:1+ (sometimes as high as 10:1). So the few large winners easily makes up for the several losing (whipsawed) trades before catching the main/a large trend.

Well probably cus you have an edge?

If you do not have an edge and assuming normal distribution, you will hit a 1:1 50% of the time and it will decreases as your risk reward increases, no?

I think Fartist has hit on the key point in this discussion. As great as 1:3 sounds, it is hard to achieve profitability using it. In fact it is just as hard as using 1:2 or 1:1 or any other ratio. The reason is that as the R:R changes, so does the winning percentage. And tracks it frustrating close making profitability elusive. I have seen numerous robots touting 90%+ winning rates. Examining them usually shows they have a 10:1 or higher R:R. So they need the 9 winning trades to make up for the inevitable loser. Adjusting the R:R to 1:1 would no doubt reduce the win rate to 50%. But which is easier to tout - 90% or 50%? And of course, the touts fail to specify the profit and let people’s greed blind them.

So using a higher or lower ratio does not provide a trading edge unless there is so other factor that affects the ratio.

I feel the secret to attaining a higher profit ratio is actually to know when to enter a trade.

By trading near support/resistance or even retracements, your SL can be minimised & your TP maximised. Setup trades is something i always do. If it didnt trigger, i make no loss. If it did, i know i am gonna reap the best yield if it goes in my direction. If it reversed, i do not make a big loss anyway.

Jumping on a trade when it is halfway to next support/rezistance is a sure way to exert more risks in your SL, hence the Profit-Loss ratio will be small.

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I believe an edge with good risk management parameters will consistently make your profitable.
As what you’ve just said above :slight_smile:

I’ll take the liberty to take this one step further and say where you enter determines your risk/reward.

Let me clarify…
If your entry is halfway through a trend, you either have a trade that you planned with a 1:3 RR stop and TP target that gets whipsawed to the stop, or you have a 50/50 (1:1) that also gets whipsawed most of the time, so your risk planning forgot to include best entry point (sell high, buy low) and you pulled the trigger in the middle ranging area of price.

Now, contrast that with someone like LeonMiyavia, who watches price come down to, but not break a support, and after seeing whatever they use as a signal, buy with a SL just below the support, they have just naturally created a good tight SL, and they are going to let the market tell them when to exit, whether PA, resistance, pivot, whatever…while varying, it could be 1:3 or sometimes 1:10 RR…but the entry made the difference.

So, good risk reward ratio is good, just don’t forget to enter at a good risk/reward entry area!

Like u said, i just make use of market noise movements to create the best scenario for me to enter with a tight SL. Not wanting to miss a gd trade is 1 thing; bidding time to let it create a gd trade is another. Combine both & u minimise the risks.

If not, why many people said that support/resistance can be either your best friend or worst enemy?

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winning 50% is far from having an edge.

Its just hard for me to fathum that traders are cool with losing 50% of their trades, and to this day, after 24 months in this business, still confuses me…

Your making profit, thats great, but being TRUELY profitable, and having your nose just above the water line, are really to different things…

At least settle with 80% win rate, JMO

I totally agree with you that 50% is not great but i went to a seminar recently which was held by the biggest spreadbetting company in the uk. The guy running it was their cheif market analyst (he also appears on cnbc,bbc etc and is an author) and he said this year his win percentage is only 54%. He did go on to say he makes more money on his options account but i coulsnt believ someone that experienced only gets 54% of trades right. What are your thoughts on that? It just seems strange to me.

Risk:reward is such a fallacy.

Enter trades adjusting position size to the size of your SL. If you enter a very high probability trade and it looks like it will provide a 1:1 r:R why would you not enter? This of course provided you are comfortable and successful at correctly identifying high probability trades. Of course it is a bonus when you scope a trade that has a small SL and a large TP, but the point is that you shouldn’t let r:R cloud your judgement. I often wonder if people actually think about things when they read/see things get mentioned a lot?

Those talking about win rates - wholly irrelevant if your winners are bigger than your losers. Sure, aim for as high a win rate as you can, but profitability is our aim is it not?

When u first started out on Forex, didn’t those schools/courses tell u that trading Forex is trading “probability”? Since it is a probability, u can never expect your win percentage to be at the fixed rate. There will be times when u have low win % and high win %. Next thing when u were taught entering a trade, it should remind u that when/where to enter a trade determines your R:R ratio. Lastly when u were taught the psychology of trading, personal feelings + risk management is what was being outlined the most.

Since Forex is a case of probability, I cannot ensure a % win rate (although I can minimise making most mistakes). By waiting for prices to retrace before trading near support/resistance, I’m using “when/where to enter a trade”. To not be rash in entering a trade at the mid-price range even though I believe it will continue its trend, I’m battling “personal feelings” to make the best decision. By letting myself enter a trade where R:R ratio is highly in my favour, I’m using “risk management”.

Just an illustration from a noob like me. Do not get offended if I accidentally did so. :slight_smile:

I should probably reinterrate that, I also trade 50% + per trade, so I have to be correct most of the time, or as often then not.

Im more around 97% myself,

When you trade 2%, its not a big deal i guess.

I totally agree. I did not say anywhere in my post that i consider win rate being the most important thing. The point i was making to the other posters is that dont get hung up on yout win rate because even professionals who are a lot more experienced than people on this site can also have a low win percentage. It doesnt bother them in the slightest because as you say they are still making a lot of money.

Like I said before, the entry should determine a natural RRR, then what makes the difference is TP at different levels, depending on the range and time frame you’re trading…for me 5 min TF on EU means I like 3 orders with TP at 15, SL moved to BE, 30 pips, at which time SL is moved to +15, and manually trail the rest to try for 60 pips

The risk:reward itself isn’t the important part, but how it relates to your winning percentage. If you win 60% of the time, even trading nothing but 1:1 will net you in the green, and being green is the only thing that matters.

In summary, the lower your accuracy in trading, the higher risk:reward you should be trading to counter-balance it.

Yes i think so , So every trading strategies and trading system should need to combine with money management rule to help traders save their investment . Without proper money management rule in gude ways of control the account , will not have good trading plan to be profiable in this risk area .

you can see the future? or you have martingale of some kind and recovery trades. or some red hot system for sure or a sure thing of some kind. how can i not be interested in 97%?

is it just me or why do spread, commision, swaps etc never seem to be built into RR calculations. also, if you can get slippage on your stop, your calculation is just a good guess?

Wining percentage and risk reward ratio are interrelated. Normally in my style that is of long term trading risk reward is more important than winning ratio. A 2 to 3 ratio 1 for risk reward is that keeps me in green side.

Ok Time Out, 97% as in 97% win rate?? I was about to go all out with the 80% win rate you posted earlier but 97%? I don’t think 80% or above is attainable given a long-enough timeline imo for the small traders like us. The 50% with solid risk management, the 54% are the true edges we can get from the market IF we really want to be rational and long-term investors and not just lucky roulette winners.

With all due respect, but I’m sick over my stomach of brokers telling the uninitiated about percentages like those in order to make an honest buck - like convincing them to pay for some courses or stuff like that. I believe we should rather tell the beginners about truly achievable goals and not about wild-goose chase…