Profit risk ratios

I’m a newbie still developing a trading plan in demo accounts. As I understand things, a key part of trading is finding a good compromise between profit risk ratios and the probability of trades being successful. More specifically, bigger stop losses and smaller profit targets will increase the probability of your trade being successful, but this will be at the expense of lower profit risk ratios. I’m looking to find a good balance at the moment.

I know every trader has their own style, but I’m wondering if anyone has some tips to share?

For risk to reward or risk to profit ratio. That part is simple you want to make at least the same amount or better than you risk. I try to look for a 3:1 reward to risk (R:R). That way if I only win 50% of my trades I still make money. It is a pretty simple concept really and I hope I explained it so you understand it. If not just ask I am surprised no one replied to this there are alot of people here better at explaining stuff.

Now I must stop you on the comment a bigger stop loss means smaller profits. This is simply not true depending on how you trade. Try to look at risk in terms of account percentage. Meaning let say you have a 1000USD account and you risk 1%. That means you are risking 100USD. Now you find a trade where your Stoploss is 20 pips. That means you can enter 5 mini lots. That puts your pip value at 5USD X 20 PIP SL = 100USD. Now lets say you win that trade and you used the 3:1 R:R as stated above. You profit is 300USD

Now you find another trade but this time your stoploss is 100 pips and you risk 1% of your account. You now can only trade 1 mini lot. Your pip value is now 1USD X 100 pip SL = 100USD. Lets say you win this trade with the same 3:1 R:R you would have made a profit of 300USD.

Now you see bu using account percentage to determine trade size according to you Stop Loss You risk the same amount no matter how big the Stop loss is. If have more risk more than 1% (or whatever percentage you want to use) due to the size of the stop loss that means you can not afford to take the trade. Skip it and wait for another one within your means.

Hope this helps

Figure out how often you win. % in terms of win.

Then figure out what types of trades help you win? Big vs small stop loss, breakout trading trend trading range trading. Then figure out what level of risk vs reward you will need to break even. Then only trade setups that give you a better risk vs reward, or increase your winrate.

Heres an example.

I only win 30% of the time. My stop losses are small, and I trade ranges. In order to break even I need 1:3 ratio. Therefore my options are only trade when risk to reward is better than 1:3, or figure out if I can increase my 30% winrate (by increasing stop loss, or trying out other forms of trading).

[QUOTE=saintpip;294594[B] [B]I’m a newbie still developing a trading plan in demo accounts.[/B][/B] As I understand things, a key part of trading is finding a good compromise between profit risk ratios and the probability of trades being successful. More specifically, bigger stop losses and smaller profit targets will increase the probability of your trade being successful, but this will be at the expense of lower profit risk ratios. I’m looking to find a good balance at the moment.

I know every trader has their own style, but I’m wondering if anyone has some tips to share?[/QUOTE]

You are off on the correct path!:13: I like the question because it makes me think about my style of trading, albeit very new style. Are you a swing trader? Or do you spend quite a few hours glued to the breaking news and charts? I think the type of trader a person is has everything to do with HOW they trade. I know this may seem like common sense to say it this way, but since we are on the newbie island I can say it without being silly I hope!

I risk 75%, sometimes 95%…

Its a uphill climb, why leave 99% of your load on ground level. If the sky is clear, take everything with you, and make 1 trip. If its cloudy, windy, 100% chance of rain, then why even leave.

Risk is just that. If you feel you need to worry about the risk, then dont even trade, because really, you already have it set in stone in your head, that, You might lose.

You know what, and Im not going to be candid about this. If you walk to work, you risk geting hit by a car, but if you look both ways, and feel its safe, you cross… Do you leave your briefcase on the corner before you cross? Do you take out your cell phone, and hand it to the lady at he bus stop? Do you say, " Hey, hold this for a few minutes, while I cross the street, then I’ll come back, and take my cell phone, and run it across the street, and come back for my Briefcase after that.

How long would it take you, to finally have everything you approached the corner with, and be finally across the street to continue to the next corner, where, you have to do everything allllllllllllllllll over again?

You call it risk, because why? YOUR----NOT----SURE

Again, I might be out of line, or some might be thinkin, this dude is a crackpot, thats all well and fine, but his is how I see risk… Once you get consistant, risk itself is almost eliminated. Now, you just have to worry about, the chance of lightning… But did you know, there are places on Earth that NEVER SEE LIGHTNING?

Live in my world, its an exciting place. Remember this one to, 94% of everyone here, will never make money.

Thanks for your replies. I looked at similar past threads, and found another perspective on risk to reward ratios. High ratios of 1:2 or 1:3 mean you are likely to have alot more losing trades than winning trades. Some traders might not be comfortable losing so many trades, and end up taking lower profits on many winning trades, instead of waiting for targets to be hit.

Again it all depends on your trading personality, high risk to reward ratios suit alot of people. Personally, I think I’d be more comfortable aiming for roughly 50% of trades to be winning, so I think I’ll go for lower average ratios, for example have a target of 50-60 pips if my stop loss is 40 pips.

I was a novice trader and I got trapped using stop loss and target profit to calculate the reward to risk ratio. However, this is not very effective. From my experience, stop loss is just your last resource to profit your capital. Therefore, you need other strategies to minimize your over loss. There are many techniques you can use, such as hedging and scaling out.

It doesnt work that way.

A RR or risk to reward ratio is just commonsense telling us not to risk more looking for less.

Just because risk is bigger but reward is smaller doesnt mean your chances of getting the reward will improve.

I found this article giving some good tips on risk to reward ratios versus high win rates, which is what I was trying to get it (sorry guys I didn’t get the questions I was posing accross very well!)

Why the Risk-to-Reward Ratio is Overrated

Having read both the thread and the article I am not entirely clear on the specifics of your question - the article was pretty generic, unless I am missing something - but for me R:R is vital to forming a trading plan, tracking progress, analysing whether a strategy will suceed etc. Personally, I will take a trade that fits my strategy as long as the R:R is at least 1:1, I prefer more than that but rarely hit more than 1:5.

I agree with the article saying that this ratio must not be applied blindly, but must suit the chart at the time, but I think that there is an implication that if there is not ‘room’ for the desired R:R then one should alter the R:R to fit the chart. I don’t agree with that: if there is not room for the desired R:R (anything 1:1 or better in my case) then for me that invalidates the setup.

I always use a Stop Loss when I trade, and target at least that amount. If I see a setup and the chart gives me room for a decent R:R then I’ll take it.

Apologies if I am missing a subtlety within your question - happy to be more detailed if I have missed something; more than possible today as we are having internet problems so all the formatting has gone from Babypips, which makes it tough to read!

ST

Thanks for your reply. I’m in agreement with what you say. I’ve had many trades in my demo account which have got close to my profit target, then retreated and gone on to stopout. I guess its inevitable this will happen at times, but I’d like my trading plan to be biased in favour of reducing these instances. This is where my question comes from if that makes sense?!

I’m planning to make sure my R:R is at least 1:1. You know then a 50% win rate will make you profitable in the long run. I’m looking to set my stop loss and profit target so the trade has a high chance of success. So when looking at a setup, I’ll decide on a good stop loss and profit target, then I will only place the trade if the R:R is 1:1 or better. Like you say this does not rule out a higher R:R, its more a case of the setup dictating the R:R rather than the other way round.

I guess achieving a high win rate also depends on other factors such as following the trend and good analysis of candlestick patterns. This is what I’m planning to focus on next.

Any further advice from anyone is welcome! Thanks again to all those who have replied.

My personal tip: you should be able to handle you down street, a row of drawdowns, you can’t take too high risk per trade, as sooner or later market will blow up your account.

A simple way would just be identifying a good and safe stop loss level. For example, it could be at the previous support level (when you are longing) etc, and from there gauge where you think would be the next probable significant resistance that price might reverse or gauge according to your exit strategy. If it is at least a 2 times risk, all is good to enter the trade. If you find the reward being less than a 1 to 1, then you should just close the pair and move on. Never ever adjust the stop loss just because it doesn’t fit the minimum 1 to 1, it is usually the result of greed and the consequences are usually detrimental. Personally, I only take atleast a 1:2 risk to reward. And, don’t ever take a less than 1:1, because it isn’t healthy in the long run.

It depends on your personality. If you do not feel confortable winning only 30% percent of your trades, your R:R should be more close to 1:1 than 1:5.

I, for instance, try to be a little be above of 50% winning trades, with a R:R of 1:1.5, I adjust R:R a little depending of how the market is acting. But just a little. Most of the time I take a R:R of 1:1.2, and sometimes 1:2, so in average Im around 1:1.5

Good luck!

It does not work like that. You need more than 50% succes rate.

The average R:R would be greater than 1:1, so an overall success rate of 50% would be sufficient to ensure long term profitability. I think it would make sense to track “low risk” trades with R:R between 1:1 and 1:1.2 though, and target a success rate greater than 50% for these trades.