I’m in the process of thinking how I should approach MM.
I understand the part of using no more than ~2% of your equity per trade. But I have a question about Risk/Reward…
It’s easy to say e.g. i’ll be using 1:2 Risk/Reward ratio. But what does it practially mean?
Does it mean:
I see a good entry point (based on signal or any other method),
Then I should assess how much I can loose/win? … How can you do that? Loss, maybe you can assess looking at support/resitance… but how do you assess win side?
Assuming I assessed risk/reward, than I calculate lot size that will equate to 2% of my account if I was to loose that position.
I enter the trade (with SL/TP).
I don’t necessarily wait till I get assumed reward, but rather exist based on what’s happening, before or after reward point.
Did I get anything wrong?
I’m still curious how you assess risk/reward of potential entry position.
Obviously a newbe question.
I would be interested to hear from you how you do MM!
Risk reward is simply the ratio between the amount of pips between your entry and your stop loss and the amount of pips in between your entry and target profit…
For instance when I’m scalping using the 5 min chart I typically only enter when I find a logical place to put a stop loss that would put it no further then 7-10 pips away from my entry and I always use a 1:1 risk reward so I will target 7-10 pips profit… And because I use 3% risk for each trade I use that to figure out my position size that would cause no more then 3% loss if the position went 7-10 pips against me.
That’s all there is too it!
If you are using a larger timeframe you would probably use a stop loss bigger then 10 pips… Lets say 30 pips… If you have a stop loss that is 3 times as large, then you have to use a position size that is 3 times as small in order to maintain the same overall risk (3%) … So you will be winning or losing more pips, but you dollar gain will be the same as the smaller time frame trade.
Thank you Christian. What you described confirms my understanding. This is basically the risk side, which is related to SL and sizing the lot, as you described.
I’m not sure where reward is considered in these calculation/process.
In your example: if you have trade where you can see SL being at 7 pips, then you choose the LOT so your max loss is ~3%. Until now the REWARD part of R/R was not considered, so … the question is: what would be the difference in carrying out your trade if you chose 1:1 ratio vs e.g. 1:2 ratio?
Your reward is the pip difference between your entry and your target profit… If your risk reward is 1:1 and your stop loss is 10 pips then you want to take profit at 10 pips… If you want a ratio of 1:2 then you will want to set your target profit at twice the pips as your stop loss … So in this case you will take profit at 20 pips
Or maybe, as the MM article I read the other day suggests, I should use my Risk/Reward rule to enter trades which have potential to satisfy RR ratio.
E.g. if my risk reward is 1:2, I should only enter positions that “I think” can give me at least 1:2 … nicely said, but I’m not sure how to assess the position for potential reward, thus my original post.
I should rename this thread to “How to assess position reward ratio”, as that appears to be what I wanted to know.
Is there any technical way of assessing that? If you can put few keywords to get me started that would be appreciated.
Using support & resistance as an example. You enter at the break of a resistance area
your stop could be the resistance area before that one & your profit could be the next support
area.
As with most things in Forex there is no completely right way of doing something, it cannot
be that precise every time, because Forex is not a precise science. Re-assess, re-assess, re-assess.
Typically you want to find a price point that appears to be a barrier keeping price from penetrating… Typically a local extreme high or low that has been tested multiple times, with each time price failing to break through… Place your stop loss just a few pips behind this perceived barrier and let the trade run… That’s the gist, the rest comes with experience
Yes it is safe to use low a small percentage of total balance in trading. when we go with management we see all related things as lot size and leverage used in particular trading. Using stop loss and take profit is good but not wait to hit Take profit if you are going to profit you can get this and close positions.