How risk:reward management can save your account!!

[LeonMiyavia]

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!!

[ClarkFX]

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.

[fartist]

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?

[CodeMeister]

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.

[LeonMiyavia]

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.

Sent from my GT-N7000 using BabyPips

[fartist]

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.

Sent from my GT-N7000 using BabyPips

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

[pipcompounder]

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.

Sent from my GT-N7000 using BabyPips

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!

[LeonMiyavia]

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?

Sent from my GT-N7000 using BabyPips

[MoneyNVRSleeps]

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

[jamessheppard]

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.