The conventional rule seems to be that the risk/reward ratio for most trades is minimum 1 point reward for every 1 point loss, preferably 2 to 1 or higher. If I were to do frequent daily scalping, looking for a minimum 5-pip profit target per trade, should my ratio then be 5 pips profit target for every 2.5 pips stop loss? Wouldn’t that subject me to frequent whipsaw losses in a volatile market? And what about intraday trading with no overnight holds - what should be the R/R ratio here?
When scalping, your biggest obstacle will be transaction costs. Suppose the spread or commission is 2 pips. If you aim for a reward of 5 pips, you lose 2 pips by default from transaction costs, so you only win 3 pips. And if you lose with a stop loss of 2.5 pips, you also lose an additional 2 pips from transaction costs, making the loss 4.5 pips.
Your risk:reward transforms from 1:2 to 1:0.67 (or 4.5:3).
I’m not a successful scalper, but from my research, the way to make scalping work is to aim for a large reward to overcome transaction costs.
You raised good point in your question, key point I would say. Stake management system is the crucial in any games such as scalping when your trading is based on finding optimum between letting winning trades go and halting losing trades. Its really difficult and closely connected to volatility. On flat market moving up and down (swinging) scalping would be a perfect way to make money but sometimes market can be unpredictable, enter trend, etc.
You need to learn how to determine market states when it fits scalping. Regarding stake management one important advice - the less is expected return per trade the more sustainable is your system…
Such spread for scalping is downright awful. For example I saw Dukascopy claiming to have an average EURUSD spread of 0.16 in European session + commissions, thus creating an effective spread of 0.3-0.5, depending on traded volume.
I’m pretty sure there isn’t a “right answer” to this question (and I’m an intraday trader with no overnight holds).
I know people who trade successfully intraday with an R:R of [I]less[/I] than 1.1 (which has some advantages because it goes along with a high win-rate, which makes position-sizing much easier and losing runs much shorter), and people who trade successfully intraday with R:R’s of up to 1:4-5 or even sometimes more. It depends what suits your trading style, what kind of trades you take, and so on.
Many of my trades have an R:R of [I]around[/I] 1:1. Some work out much higher, because I let about the last third of my trade run after ensuring at least breakeven overall. So it’s a complicated question that depends whether you let trades run, scale in/out, have fixed targets, or whatever.
For what it’s worth, I disagree strongly with the advice sometimes seen in forums of “never taking a trade with an R:R of less than 1:2” (I’ve even seen people say “1:3 minimum”!). That advice seems to me to be almost [I]designed[/I] to create problems for aspiring traders.
R:R is only one part of the equation. What matters is overall [B][U]expectancy[/U][/B] (“having a proven edge”), and neither win-rate nor R:R [B][U]alone[/U][/B] gives that picture.
Spot on! It does not matter what you risk, if you have a losing system.
You can risk more then 5% of your account scalping! But you want to make sure your system has a good winning edge!
You cant just win 51% more then you lose. You have to win consistently.
An easy way to work out your risk per trade is to trade with a consistent low lot size for a while and analyze the results. The more you trade the more trading statistics you will gain. Then you can set your lot size based on your account drawdown.
No formula can predict your risk without first knowing your profitability and drawdown.
In scalping, you need a high win rate, its not about risk to reward and sometimes trade goes against you a lot more than your expected take profit. Mostly trade is closed manually whether in profit or in loss.
Scalping is a very specific trading strategy and doesn’t suit many, and when it comes to risks, here a lot depends on whether you follow money management or not.
i have to agree with lexys, as per say i dont think there is a perfect ration to it, but to keep it with in the right given ratios and the right money management should sum it all up… and consistency is the key, as much as possible avoid losing trades more than trying to acquire winning ones.
