A Traders Disadvantage!

Beginner Questions
1

hey everyone :slight_smile:

i was just playing around with some risk : reward ratio’s last night and found some rather interesting figures

but first i would like to give you’s all a scenraio followed by a question…

you have a trading account of ďż˝/$1000

you risk exactly 5% of you account balance on each and every trade

your risk : reward ratio is 1 : 1

your win ratio is a perfect 50% IE. 1 win 1 loss 1 win 1 loss 1 win 1 loss,etc

spread,commission or interest is NOT a factor

over the course of time what will this do to your account?

will you finish the year with a profit? loss? or break even?

look forward to hearing your answers :stuck_out_tongue:

lee :slight_smile:

2

it depends on whether your first trade is a win or a loss.

3

the result is actually the same either way :stuck_out_tongue:

lee :slight_smile:

4

you always loose. to recover a 5% loss you need to make a 5.26% gain.

5

Correct, over time a perfect 1:1 50% win/loss split will result in an empty account.

6

correct :slight_smile:

just to break even you would need a risk : reward ratio of

0.95238095238095238095238095238095 : 1

with a 50% win ratio

again thats not even taking into consideration the spread

so as you can see we traders are from day 1 at a disadvantage!

both the market and the broker have an edge against us!

and as everyone knows the slightest edge just like in casino’s will always prevail over time thats why most forex traders fail in the long run

lee :slight_smile:

7

well, if you keep your risk/ reward at a constant absolute value e.g. 100$, you will “theoretically” get even … of cause you wont gain as much in that case if you are able to shift your winning percentage above 50% :wink:

8

That’s why you should [B]not[/B] overtrade.
That’s why you should [B]not[/B] trade because trading is fun.
That’s why you should [B]not[/B] approach trading as a gamble.
That’s why you should [B]not[/B] take trades based on gut feeling.
That’s why you should [B]not [/B] trade if your mentally stressed.

:smiley:

9

depends on how many wins vs losses you have or a defined period. Bottom line you certainly will not make money and chances are you will slightly erode your account if you have a 50:50 win/loss ratio.

10

Depends on your strength of character really.

I had an awful Mon-Tues (relationship problems), I traded Tues to get away from it all and made 2 nice scalps for 50 pips.

The emotional stress and headache (literally) didn’t seem to adversely effect me - thankfully.

11

either way psychology plays a huge factor in trading

but if you can learn to control it then it should not have a negative influence on your account

lee :slight_smile:

12

[B]The profit equation is…[/B]

risk/reward x loss/win > 1

It is not difficult to find a system that has a risk/reward > 1.

We do this by setting a target profit greater than the stop loss.

The win/loss ratio is more difficult to control.

However, the spread is an edge against us immediately, especially if you are scalping for only a few pips.
In such a case the spread (which must be earned first) becomes a huge percentage of the total profit.

This is why we must let our trades run if they are in profit and cut our trades off promptly if they are in loss.
It also gives advantage to longer term trades.

13

[B]A lot is touted on this forum about psychology of trading and the need to get your emotions under complete control.[/B]

I do not really believe this. :stuck_out_tongue:
I believe there is too much hype in all this. :frowning:
It is not really possible to change your personality.

My answer is different - I simply believe that you should not trade when you are feeling down. :wink:
A spirit of depression will otherwise invade your trading and your sub-consious will war against you thus generating a loss.

There is nothing wrong about getting excited about a winning trade as long as [U]you remember to pay attention[/U], so that you do not forget to exit at the right time.

14

as usual i agree with your words of wisdom tymen :stuck_out_tongue:

lee :slight_smile:

15

Good scalpers can get by with less than 1:1 risk reward because their accuracy is extremely high

Good swing traders can get by with 10-30% accuracy because their risk reward is really high.

1:1 and 50% is a good place to start if your a newbie but will end up in losses.

Trade around support and resistance and shoot for the moon when your right and this will take care of itself.

16

d’oh! that’s right :slight_smile:

18

Think about it this way.

Say you make one bet. You risk $4 to win $1.

Would you continue to make this bet? :o

Edit: Of course if your confusion is just about the math then, yeah!~

19

I can say honestly that risk reward is not the solution.
Here is an example. The risk for a lottery is $1. The reward
is big. Yet, most people will go broke trying to win the lottery.

Therefore, the solution or the holy grail is to win as much
as you can. Heck, if you are winning most of the time why
bother with risk reward???

21

If you are winning, risk reward is not important.
That is the point.

If you are winning; you are winning. Who cares…
Who cares about risk reward…

I am winning… That’s all that counts…

23

And that is the point. If you lose one or twice, I won’t count that against you.
A holy grail is a holy grail. It does not have to be ultra perfect.