Hey folks it’s Chris here. I’ve been trading for about 4 months now. I’ve read a few books but i’m trying to expand my knowledgebase as I try to employ a profitable strategy. Things I think I’ve learned about Forex so far:
Risk Management is the key to being successful.
Emotions are a traders kryptonite
Believe what you see
Patience is important
Greed will get you killed (figuratively speaking)
You dont need to win more trades than you lose to be profitable
Risk : Reward ratio (rrr) of
10 : 1 is easier to attain than 2 : 1
2 : 1 is easier to attain than 1 : 1
1 : 1 is easier to attain than 1 : 3
1 : 3 is easier to attain than 1 : 10
For (rrr) 10 : 1, winrate of 91% is required to break even
For (rrr) 2 : 1, winrate of 67% is required to break even
For (rrr) 1 : 3, winrate of 26% is required t o break even
For (rrr) 1 : 10, winrate of 9% is required to break even
Although, a winrate of only 26% is required to breakeven for rrr of 1 : 3 . It is way much harder to achieve than rrr of 1 : 1 . To say that we can obtain rrr of 1 : 3 is akin to saying that we can predict the market like a fortune teller. Furthermore, if winrate of less than 50% is required to trade forex, why don’t we all just go to the casino, i think we have better odds playing baccarat.
To say that,
“You dont need to win more trades than you lose to be profitable”
Think again . . .
I have to say that this is in direct contradiction to my own understanding of risk reward ratio (though it is my preference to describe it as a reward/risk ratio by taking the reciprocal measurement).
And to prove that point, I am running a trade journal where the expected reward risk ratio is 11+ : 1 (or in your terms 1:9). I am doing that specifically at an allocated cost of £1.8K only to prove a point to myself. That I am so convinced of the validity of the backtested results over five years that I am willing to risk £1.8K for a calculated gain of £6K with a 4% chance of account blowout. And I am tracking it on this forum. I have a 95% expectation that the results will remain within the parameters predicted by 10,000 iterations of a Monte Carlo analysis. If I am wrong I am prepared to spend even more money to find out why by seeking professional statistical advice. I am doing this because of the potential future reward, which is a thousand times the risk. I may end up in the poor house, but it will have been a hell of a journey to find out.