Proper Risk Reward Ratio

I’m trying to get my risk/reward ratio right because I hate getting stopped out early. Is a max loss of 5% of the total trading account too high per trade? Currently, I’m figuring out what 5% equals in pips and then setting my stop there. Its a nice fat spread so I don’t get stopped out early and I give the trade a chance to correct. Your thoughts are greatly appreciated. Thanks PIPBULL.

That particular aspect of your trade plan should be directly influenced by your objectives for the specific trade.

If you think about the reason for placing a stop-loss in the first place, then it might get you thinking about where you�d want to be exiting your trade & why.

It has less to do with the risk-reward matrix & more to do with engineering a smart entry, regardless of whether you’re executing from a 1min chart reference or a 4hr one.

If you�re trading from a purely technical angle, then your stop-loss will be sat at a level, which tells you that your entry is no longer valid.

That level will vary, dependant upon your specific aims & expectations for the trade. It might equate to 77pts on trade 3�. 43pts on trade 4 & maybe only requires 15pts on trade number 5. Like I said, it depends on how effective your strategies are in the conditions under which you’re operating.

I�m really not a subscriber to all this pre-trade calculation of risk-reward.

Sure, after the trade has run it�s course you can calculate the return % of your trade & log it in your records. But until you�ve got a few years of repetitive trade behaviour/experience under your belt & you possess a real in-depth knowledge of your strategies, then placing emphasis on r-r from the off can actually be counter productive.

Far better to allow your trade to develop (or not) & maybe think about utilizing a trailing stop facility or a stepped profit paring & trail combo.

Anyhow, that�s for you to think about & implement as you see fit.

I agree with Tess, and it would definitely be worth your time to learn up on some simple support and resistance concepts. Those are very effective for setting stops, even if they have nothing to do with your trading strategy. I like to use areas of consolidation, candlestick patterns, and fibonacci levels in combination to find strong areas of support or resistance and set my stops just outside those levels.

Risk/Reward should not determine where you set your stops/targets, but rather IF you should take the trade at all. Look for likely stops/targets, and if the ratio isn’t very favourable, then it’s probably wise to not take the trade at all. Altho often I will have a set stop but an open-ended target, so it can be a little tricky, but it’s still good to have a general idea of where you want to get out. Just make sure you aren’t putting lots of money on the table for small gains!

Don’t confuse your terms here. It will only muddle your thinking.

Defining a 5% risk level (or whatever % your choose) is something you need to do as part of your general determination of your risk strategy. It’s not part of the risk/reward thing.

And on risk/reward, do not think of it as “How much risk do I take to get X reward?” That will tend to have you thinking too much about your upside and too much about making your stop fit the ratio you want. Think instead “I’m risking X, how much reward is to be expected?”

You guys are really making me wonder how the heck I’ve made all this money in the first place.:eek: I’ve only been trading a year, but my account has more than quadrupled by keeping it simple and following the trend. My indicators all line up, I check the news and eco calendar, wait for a confirmation candle to close and pull the trigger. The first trade is a “get toes wet trade”, then once the trend is confirmed I jump in again at larger lots and if its a really strong trade I’ll double down on the third trade:cool: This strategy allows me to really confirm a trend and the subsequent trades make a lot more money on smaller moves.:smiley: I think if I did it Tess’ way, I would be giving myself way too much to think about and mess up my head for decisive trading decissions.:o

Sounds like a good approach to me.