What are your guys thoughts on using a 1 to 1 risk to reward ratio. Im back testing different strategies and it seems to be a very successful ratio. From what i know you can have a 1:2 ratio which means you only need 50% wins to make profit. I know some people even use a ratio such as 1.5:1 meaning you need 50% more wins than your losses to make profit.
My question is what is your preferred ratio? Would you ever consider using 1:1?
I would always consider making a profit from a trade.
Hi Beibian,
It can also depend on the quality of your setups. 1:1 can work if you have a high win percentage, but I like to look for higher quality setups that can yield much larger rewards.
But always remember who is in control, and it’s not you. You take what the market gives you, not what you want. Sometime you get 1:0.5, sometimes 1:1 or 1:1.7666669.
I will direct you to my reply on similar thread here
Hope this helps.
Good luck!
there’s either a minor typo or a major arithmetical mistake in that sentence
if you have a risk-to-reward ratio of 1:2, any win-rate above 33.3% is profitable (ignoring commissions/spread)
if it had the best net expectancy, yes, of course
but it takes a lot of methodical observation, testing and calculation to know that with confidence
you’ll often see “forum advice” never to trade without a 1:2 ratio or better
this is truly horrible advice: it means that you’re necessarily going to have some really long losing runs
and especially when you’re new, that’s just what you want to avoid
it might even be better to have a (slightly) less profitable method that’s easier to handle
many institutional traders, and some successful retail traders, even have a risk-to-reward ratio of less than 1-to-1
(for example, among professional scalpers, a ratio of 1:0.5 is very common indeed, i’d almost say it’s “universal”, and if you look in almost any of the standard “price action scalping” textbooks, you’ll see detailed explanations of why that’s recommended - it normally goes with a very high win-rate of course (like 85%+), and of course i’m not recommending that you should be a scalper, i’m just using it as one illustrative example that answers your original question)
from looking at the questions you’ve asked in both the recent threads you’ve started, it looks like the concept of “expectancy” (and what it entails) is the thing giving you a problem, right now?
First of all thanks for the very well put response. Secondly i apologize for my terrible maths. I was just shooting from the hip with that figure. I did notice that a risk to reward ratio less than 1:1 had a big improvement on the win rate. Still 1:1 provided more money earned at the end of the year.
I picked 1:1 because it made it very easy to back test different entry strategies quickly. I am very happy with the results so i want to use it for demo trading. Everything seems a bit to easy at the moment so im just expecting a major disaster to unfold. (Win rate is around 60%)
Thanks Matty. My win % is anywhere between 60%- 70% depending on the strategy. I read through the thread quickly. I never really considered changing the RRR for each trade. It seems that you adjust the RRR to suit the market conditions. I just wanted to keep it simple but i suppose if you are able to adapt with the market then your win% should increase. For my strategy i always use the same RRR but change my pip target.
I think one has to be careful and not be too blinkered with ratios. The ratio itself is not what sets our targets and stop levels. Both of these levels should primarily be determined by what our charts are showing us. First assess the quality of the trade set-up, then establish a sensible target level based on where you feel price might reach, and then identify the sensible level for placing your stoploss order. This should at an area where, if reached, your reasons for entering the trade would be nullified.
Only then look at what R:R ratio this equates to. If it does not fit your risk/reward parameters then don’t enter the trade. If it does, then go for it.
Having said all that, your trading plan should include some kind of R:R that suits your trading style. A position trader might look for profits 4-5 times the risk whereas a day trader may be comfortable with 1:1 if working from, say, 15m or 5m charts. The logic here being that the target on short term moves might be only 15-30 pips but then a stop level of less than 20 pips would be too tight and cause too many stop outs. So 1:1 could be just fine (sometimes even less as @flamingoproxy says above) and consistency then becomes a question of win/loss percentage rather than R:R).
Thanks for the help. I think the idea of setting the stop loss at the point the trade is nullified is worth testing. I kind of do it backwards though. I set my stop loss in regards to where i expect to take profit. I will need to learn to analyse when a trade is getting nullified. Maybe this could be when it touches a large moving average (200) which would indicate a change in trend.
good thinking
that’s even one you can use without testing, because it’s kind of axiomatic to set a stop-loss at the level at which you’ll know, if the price reaches it, that the entry was “bad” and you don’t want to be in the trade
you need to determine where that is by testing, though (and with reference to price movements, not to your profit target!)
sounds like you’re already ready to change your mind about that approach, though - and that’s a good thing
good luck
it all depends on things like if my last Swing High/Low is close or far for me to put my stop loss in there, or where is the next support/resistance or PRZ area?.. so my R:R is varied based on the market conditions , but i will NEVER take a trade with a R:R lower than 1:1 , NEVER , and also a fixed R:R really doesnt make sense(in me opnion) 
you must think that all the institutional and professional traders making their livings and fat bonuses, over the years and decades, with their standard ratios of 1:05 or 1:0.75 are doing something wrong, then? if so, i hope that belief works out well for you!
Beyond an important, widely utilised, moving average would be much better than when just touching it. Particularly if that moving average forms part of your original entry criteria. Another example might be the other end of a signal candle that generated the entry decision. @Shrezinc mentions another sensible area beyond a recent swing high/low, again, if that approach is part of your entry strategy.
These are IMHO good examples of where to place a stop since they are all identified areas supporting the reason for having entered the trade in the first place: a direction reversal, bounce of S/R, etc. If those types of criteria are breached then the trade has failed and should be exited as soon as possible and wait for the next. i.e. cutting losses short, running the winners. But again, once these areas are defined it is possible to check the R:R and, if it does not make sense, then ignore the trade.
This is again very sensible, but not necessarily as a “golden rule” for all traders, but because it demonstrates your personal strong application of discipline to your personal method and approach. This is also very important. It is pointless designing and even backtesting a strategy based on more than 1:1 and then slipping into taking other types of risk scenario.
But R:R is not the only way to evaluate a trade. In theory, one should always have in mind the maximum amount of money in absolute terms that one is prepared to risk on any one trade. For example, you could start with a trade quality evaluation system which defines the positive expectancy of a potential trade in numerical terms and then only select high probability trades. Then one can assess the target and stop areas in terms of pips and then calculate the position size such that the stop distance represents a total loss within your limitations. In this case, the trade success expectancy is more crucial than the specific R:R, i,e, the win/loss ratio.
The point is that the trade setup, its expectancy and the identified areas for targets and stops are sensible. In time, I think most traders learn to assess these factors intuitively from previous experience much in the same way as we drive a car.We judge traffic conditions, speed, position, direction, gear selection, etc, all simultaneously and without just focusing on just one of these.
I think 1: 2 risk-reward should be maintained in every trade. The profitability ratio is in the comfort zone.
A 1:1 risk to reward ratio can work if you are already doing good in the market. But if not, I think you should at least use 1:3 to manage risk/reward more directly through the use of stop-loss orders derivatives like put options.
Nah rrr to me is just a fantasy,i cant control how much to win for jm just a human.setting ratio is just self-righteous
Its a fallacy amongst traders that you need a big r:r to make money trading. Yes, sometimes you can see a good entry set-up which seems to offer clear sailing for your price all the way to a TP level 3 or 4 or more times further away from entry than your stop-loss. But the further away it is, the less likely price will ever get there. And the more likely price will not get there in one steady run either, it will more probably move in a series of runs and pull-backs that will just whittle away your belief in the ambitious TP.
In fact, a modest actual r:r (forget the fantastical target r:r’s) is much more achievable and can still bring you good returns. If you only get 1:1.4, you will be potentially making good money.
I prefer to use at least 1:2 risk to reward ratio
The only accurate r:r is the outcome r:r, not the plan r:r.
So when you’re entering a specific trade, you can hope for whatever ratio you like. But what counts is the actual r:r from closed positions after 100 trades.
Agreed, I keep track it on weekly though i focus to keep the risk to around 5% pips of the reward.
1:2 ratio would be my prefer ration. But as Tommor mention above, the outcome r:r is way more accurate as it clearly show the consistency in your trading stratergy.