I just opened a demo account with Oanda a month ago. I have been heavily engaged in learning Forex every day. I read almost every page on Johnathon’s price action thread and found that it seemed to be the most reliable system for me. I have been testing my strategy both in the demo account and going back to back test pairs with the F12 key and keeping track of my score on pieces of paper. I pulled the info into Excel and turns out I have exactly to the number a 50% win to loose ratio and I was profitable. So far on the demo account risking with 1 to 2% of $1000 dollar account I have hit a high of $1047 and a low of $948 My equity with open trades now id $1005. I use FX book to keep track of statistics but not enough time has gone by to get an average with the demo account.
On the back testing and the demo I have been using anywhere between .5:1 to 2:1 RR ratio. I have been guilty many times of taking my profits early and letting losers run. However there seems to be a direct correlation to RR and win %. My question is that it appears that I can accept a low RR and a high win % and make money that way or loose money that way. Or I can accept a high RR and low win rate and make money that way or loose it. I know there is an equation involved with this somewhere, So what is the point of putting so much emphasis on RR when Win/Loose % seems on a 1 to 1 with it. So you could pick a range of RR’s and you will still make or loose the same amount over time. I know it is not quite this simple but I am just trying to wrap my head around it. I could close out the 4 trades I have running now and keep $30 and loose $2 GUARANTEED or I could chance it and hope they all hit my TP levels and make $120 or loose $80.
Seems like with a 1:2 RR the chance of it hitting your stop is higher than your TP thus cancelling out the benefit.
It would be nice if there were a way to obtain statistics about this during the course of demo trading to see what my perfect RR is. Maybe through FX book?
You could close half of those trade and adjust stops. What is the price action telling you when you look at the chart.
Also keep a eye out for major news on the pair cause that could kill a good trade quick.
Sorry I am not such a good teacher but that’s something you can try. Hell I dont even know if I answered your Question
Ill prob get flamed for this but after seeing too many good trades go bad waiting for those last few pips just to have it turn around, That much of the time I take my profit before it hits my tp. Im not getting my whole 1 to 1 or 1 to 2 But so be it.
Or maybe Im just a bad trader. who to say.
A smaller reward (or R:R ratio) will usually result in a higher probability of winning.
There’s no definite answer as to which R:R ratio is ‘optimal’. If your backtests show you that different R:R ratios are profitable, I would choose the R:R that would suit your personality. From my experience, higher rewards result in lower probability of winning, and thus greater drawdown inbetween wins. If you’re emotionally affected by drawdown, a smaller reward and higher win probability would be better. And this is just my opinion, but I get the feeling that a 1:1 R:R ratio is the most robust. It’s easier to identify a system that’s stopped working with a 1:1 ratio (e.g. if you experience 10 losses in a row with a 1:1 R:R ratio, that’s a good sign the system is failing. On the otherhand, if you use a high reward:risk ratio like 5:1 and you experience 10 losses, that’s still acceptable, but would you still be confident in trading with such a significant drawdown?).
Alternatively, you could use backtested R:R ratios as a ‘guide’ while using market structure to place your TP and SL. For example, you might find that R:R ratios of 0.5:1 up to 2:1 are profitable. You enter long, and place your SL below a support level 100 pips away, and your TP at a resistance level 100 pips away. Your R:R ratio is 1:1. This falls within your range of 0.5:1 to 2:1, so you have a reasonable expectation of profitability. However, you’ve also boosted your probability of winning by taking market structure into account (using S/R levels as your TP and SL).
There is a rule of thumb you can apply. Basically if you treat your trade as a random event, your win:loss ratio is inversely proportional to you reward:risk ratio. So R:R of 1:1 has a a 50% chance of winning as a random event. R:R of 2:1 a 33.3% chance andR:R of 3:1 a 25% chance of being a winner.
Unfortunately forex is never that simple and a little matter of spread a slippage turns the odds back in favor of the markets if you treat your trade as a random event. And the odds get worst the tighter your sl and tp points get.
Example your system you scalp with a 10 pip sl n tp. A R:R of 1:1. Seems right you have a 50/50 chance as a random event. But if you now have a 2 pip spread the moment you place your trade the price is now 12 pips from your tp and only 8 pips from your sl effectively making you true R:R 12:8 or 3:2 meaning you will only win 40% of the time as a random event. Lucky for us trading isnt random and as long as we stick to the rules we so diligently develop over years we turn the odds back in our favour
Good points. I don’t think toying with R:R will result in much of an edge. If the “system” is your edge, then a complete system would include an exit strategy, just like the logic to enter the trade was applied.
I exit partial profit and/or move my stop to break even/trail as the trade runs based on the information I’m getting in real time. I know when I enter that anything can happen, so I need to react as the probabilities move against or in my favor. That allows me to be extremely flexible on exits. Cutting it early if needed and letting it run if the probability continues to be there.
In addition to above which should be 100% of what you should do before anything else, you can also take your 10 most profitable trades and your ten least profitable trades and review look for similarities in each. It’s just as important to know why you left money on the table and cut winners short. Having said that, in my opinion this it’s about picking highs and lows; but the profit in between. My favorite forex quote " nobody ever went broke closing a trade in profit."
One last thing; They have a saying with regards to Texas Holdem; " Take a minute to learn. . .but a lifetime to master." Forex trading is the same. The more you practice your system; the better your edge. Just always try to make the same mistake the least amount of times as possible. Hope that helps
Gp
All good stuff. I really feel like any traders initial decision to get into a trade should be constantly made over time during the trade as well. Really it is the same type of decision. half way to your 1:2 tp you may say “would i take this trade now in the same direction to the same tp?” I feel like good trading is constantly asking this. If the answer is "no but i would take one in the oposite direction " than it would be best to take profit early. Im up on a short of the NZD/SGD short right now. Price is stalling at a trendline base at 1.0334 on the way down to my TP 50 pips below. I feel i should get out in profit if it shows a PA signal to reverse on this line. If it shows a strong candle break below i would stay in to Tp. In other word take the RR the market is willing to give and asses this in the highest probability.
