Hi there.
I have recently been involved in a thread debate/discussion/argument about a guy who posted signals free on a blog. I will not mention the blog, nor the guys name as that isn’t the point of this thread.
As with all heated discussions, after everything has died down, you begin to analyse everyones point of view to that argument in order to establish if you can learn anything from it…
What i have been left with is a question, that i believe is very pertinent for us traders.
I have always been of the opinion that money management matters more than the risk to reward ratio of any trades you take.
The reason for this is perhaps my style of trading which in a nutshell is to follow a trade until it turns against me. It goes alot deeper than that obviously, but in a nut shell if i get the direction right i will stay in it as long as i can, taking profits along the way.
I understand that alot of people have particular profit targets in mind when they trade, and aside from technical analysis, this can be purely a Risk/Reward thing “I risked 50 pips, i wanna get 100 pips”. 1:2 Ratio, makes it worthwhile for me to enter the trade.
Now my view on this matter is that each trade should be subjective. That is to say, you trade what you see at the time.
For example i enter short on a pair, my initial target (on my system) would be the bottom Bollinger Band, with the option of taking that trade (should price hit my target) to the next higher timeframe, and basically chasing the movement with some sort of trailing stop.
Heres where it gets interesting…
Say you put in a firm target, you entered short at 100.50, you set your target at 100.00 with a 25 pip stoploss. this would be a 1:2 Risk/Reward ratio right?
You set your pip amount to the maximum possible for your equity/margin…say $5 a pip. That would give you a �125.00 worth of risk (stoploss) for a potential $250 of profit.
Now,
Say that trade was set as a Take Profit, at that price (100.00) yet the price kept on going down…past your target for say another 250 pips. You are out of that trade with profit at your set target, but haven’t completely maximised on that movement. So you have your $250 of profit…but no possibility of getting anymore unless you enter again and risk the position going against you.
Now lets say you didn’t risk your maximum amount per pip, you only risked half (i wouldn’t do this am just using it as an example) so $2.5 per pip.
You set no target as your’re planning on following the movement until a significant change in price direction…you can afford to do this as the risk on your margin isn’t so high as the prvious example.
So you enter $2.50 a pip at 100.50, stoploss the same 25 pips @ $2.50 a pip so $65.5 risk.
The price drops like a stone, past 100.00, down to 99.00, 98.00 to 97.50 then begins stalling, it looks dodgy, stochs/macd are oversold, price you get out. You make 300 pips on $2.50 a pip so $750.
Now what has made you the money?
Is it the Risk/Reward…or is it the money management?
My point is that i find risk/reward a bit of a handicap…should you stick to your R/R ratios or should you trade the price as it is happening?
I would go for the latter.
I know that is a basic summation, i am sure there is more to come, but i didn’t wanna scare people away with a huge first page!
Am interested in everyones opinions in this matter.
As a side note, please don’t get aggressive on this thread, we are adults, we are here to help each other…and frankly i had enough of that in the last thread.
Let’s be constructive ok?
Best of luck to you all.