37.5% Win Rate 2:1 R/R - Can you be profitable?

Beginner Questions
1

With all the various trading systems, discussed on this forum & many other forex forums, and plenty professing they are profitable, would it suggest that it is not the system that is making the money, it is something else?

The classic example is the Turtles, they all had the same rules yet the results varied.

So can you trade with a 37.50% win rate and 2:1 RR? If yes you should be able to make money with compounding your profits & losses.

To illustrate my point create a spreadsheet with these columns.
A1 - $1000 - Start balance
B1 - =A1*.0002 - Pip Size per trade calculation
C1 - =rand() - random calculator
D1 - =if(C1>.625,50,-25) - if random number greater than .625 the 50 pip win, else -25 pip loss, you could change to 20, -10, etc
E1 - =B1*D1 - Profit or loss calculation
A2 - =A1+E1 - Start balance + profit or loss

Now copy B1 to E1 to the next row to match up with A2, therefore the whole row 2 has now got calculations.

Then copy A2 to E2 and paste as many rows as you like, eg 1000 rows. What is your balance then?

Now the pip size might become to big but my point is with correct money management, profits can be made with 37.5% win rate with 2:1 RR. You need more than 50 trades in a row to lose your initial capital.

I personally place 4 trades per night, 20 for the week and my goal is to get 7 winning trades out of 20, and if so I make a profit for the week. So I don’t focus on the individual trade but focus on the outcome of the week. For example last week I had completed 7 wins on Wednesday, so knew I had made a profit for the week, and then the next two nights lost all 8 trades. Now many would panic losing 8 in a row but if you understand your goal there is no need to panic.

This may seem simple and I hope it is. Can you achieve 37.5% randomly?

2

How are you picking your entries?

At random?

3

37.5 win ratio with 1:2 risk/reward…you will be profitable if you keep slippage below 4%

4

Do you employ martingale ?

5

Samys,

The entry doesn’t really matter, that’s the point I’m making. Could you make the same win ratio & R/R randomly. I’m not sure, I am actually testing that.

What I will say is you could use MA crossover, Breakout, PA, S&R any entry parameter and if you can achieve 37.5% & 1:2 R/R, you can be profitable.

Brandnew2FX,

No I don’t use martingale. My calculations for pip size are exactly the same as the spreadsheet clac’s I referenced earlier.

6

What about slippage?

At 1:2 risk/reward do you think you would actually maintain that ratio after you liquidate ?

Your entry might take a bit off and your exit a bit more…so eventually your 1:2 might look more like 1:1.5

That would then change the whole picture as at 1:1.5, you would not be profitable with a 37.5% hit rate.

Might be a smarter move to set 1:2.5 and allow the 0.5 to take care of slippage. Might be enough, maybe not but you could adjust it then to suit the pair you trade. Each pair would have it’s own characteristics.

7

Random Equity Curve Simulator of a trading system. Learn it before you trade
here is a graph with your parameters.

equitycurve.jpg700×542 63.6 KB

8

just out of curiosity: what is the worst historical drawdown of your trading in the backtests?
37.5% W/L could be distributed very funny days. but guess a lot depend also on your position size vs equity.

9

Brandnew2fx,
So far slippage hasn’t been a problem. My broker I setup my trade entry and if it doesn’t enter within two pips no entry is taken, eg if news creates a quick spike. Of the time I’ve real tested I’ve only had slippage once on a stop by approx 10 pips.

TingTong,

I’ve created a random spreadsheet similar to my example with alot more statistical info. and on a click of a button it recalculates. The most in a row is around 20, on one pair.
In real life stats so far is 8 losses in a row in 5 months data on one pair.

Please note I trade 4 trades a night (Aussie time) and consider them as one. So on an individual 8, on the collective pairs 2 in a row of all 4 wiping out.

10

Yes. Entry would not factor in slippage but exit most certainly would.

I should have presented it more correctly by saying take profit or cut loss as your real risk/reward ratio depends on what is the actual price you took a profit or what is the actual price you stopped the loss.

You may have intended a 10 pip stop loss against a 20 pip profit and when put to the test you end up with a 12 pip stop and a 18 pip profit.

Your risk/reward ratio of 1:2 just washed off down to 1:1.5

So you can see a 2 pip slippage CAN be a big problem

11

I understand what your saying re:slippage.

In my real life trading. I set the target at 51 pips & 25 stop. On all occasions I’ve got 51 pips target and apart from once when it went through by 10 pips on stops the worst I get is 26, but mostly 25.

My broker spreads are 1 during UK & US sessions when I trade and I trade EURUSD & GBPUSD only so I don’t have to many problems so far.

You could change the parameters in the above spreadsheet to counter for slippage.

The reason I posted was the fact so many focus on the holy grail entry & exit and I was showing that 37.5% plus 1:2RR can be profitable, and yes I agree there can be other small factors to consider and can be factored in accordingly.

I wrongly see people post you must have greater than 50% win ratio to have an edge, and that is truly incorrect and only a third of the story.

12

Not trying to hijack thread, but would a system that generates 1:1.3 and have 60% win be considered good? This would be using low risk like ~3%

13

The lower the risk/reward ratio, the higher the risk vis slippage because the greater the effect of slippage.

It would be better I think to go for a higher risk/reward ratio as the effect of slippage is reduced. Also the hit ratio can go lower to be profitable.

15

I don’t get this idea, especially based on random entrys.

I be noob so salt required, but I find risk reward somewhat artificial to make us feel better. If you set your r/r at 2:1 aren’t you going to hit your S/L twice as often as T/P and that’s before the spread?

16

Ah Jaroon you have much to learn, isn’t the situation worse than this as price, for example, may hit a s/l of 10 pips at a rate of more than 2:1 because if t/p is 20 pips sometimes profit reaches 16,17 pips and reverse down to minus 10 pips. It has more chances to fail.

Fire proof pants on, doubtless I’ve missed something in the maths:)

17

Hi Jaroon,

I’m a newbie myself but I’ll try to explain the concept as best as I can. When you say that you have a 2:1 R:R that means that you are looking to gain twice what you risked right?

So if I were to risk 10 pips on my SL then my TP would be 20 pips. Now, this does not necessarily mean that you are twice as likely to hit your SL than your TP. To put it simply, let’s take an example:

Let’s say I have pivot lines on an hourly chart of EUR/USD. Let’s say that the EU is finding support at the S1 line and that the next resistance level is 20 pips away. I enter the trade at the S1 line with a SL of 10 pips (which is just below the S1 line) and an expected TP of 20 pips. This doesn’t mean I am twice as likely to hit my SL. It simply means that I entered my trade at the optimal time maximizing my TP and minimizing my SL.

In short, by taking trades with good R:R ratios (ex. 3:1), I can have a system that only wins 50% at a time but still be profitable. The lesson I think is that just because a trade looks good doesn’t mean you should take it. The R:R ratio should also be considered.

I hope I was able to explain it somewhat…

19

Thanks Vonner,

I agree with everything you’ve said there. But for the r/r ratio to be valid the you must select the right trade, always the problem:) Sorry if i’m being pedantic, I guess it’s a noob arguement I’ve been having with myself.

Taking your example and assuming I was a bit mad (small stretch) if I enter my s/l at 20 pips and t/p at 10 pips, is this a 1:2 R:R ratio? Mathmatically yes but we’ve entered, what we hope is a higher % chance of profit so the risk is not as much as the math suggests. Sorry I’m losing my own thread a bit:) If I don’t set a s/l (like my first demo:)) do I have an infinity:2 risk reward. Yes, but margin/lot size etc. should mean in practice no.

I should be thinking this not posting it lol

20

Thanks Matt I think thats what I thinking:)

21

Like Matt said, the assumption is that you are taking the trade based on a system whose odds are in your favor :slight_smile:

There are other ways to lock in profits as well such as using a trailing stop loss or moving your SL to breakeven as soon as its reasonable to do so. :slight_smile:

Understand how you feel that, all things being equal, having a TP of 20 and a SL of 10 means that chances favor your SL. But because we do have trading systems, these SHOULD (but not always :() mean that the chances of the trade moving in the direction of our TP is higher than moving toward the SL.

22

Just to clarify I’m not advocating random entries, I am testing this myself for humour.
What I am trying to point out whatever entry process you use, if you can achieve 37.5% with 1:2 Risk Reward then as long as you get the important factors rights, eg money management & emotions you can be profitable.

Most will see the title and see 37.5% win rate and move on and still look for the 90% holy grail system.

If you can focus on what you can control, money management & emotions, and understand what achieves positive expectancy then one can win the battle in this game.

As I mentioned in the first post. The Turtles had the same profitable system, why did they not all become profitable?