Risk vs reward

I guys,

I have finally dumped my demo account after 2-3 months and have opened a mini account to start.

I have been seeing some people do a risk reward in reverse, having a 30 pip stop for a 20 pip gain, I am wondering what you guys thoughts are on this?

So far I have been speculating on levels of support and resistance, moving with volatility, just taking what I think the market can give rather than trying to hit 20 or whatever number of pips like some strategies say.

So my dilemma… Do I use a risk reward ratio of 2:1, 3:1, aim for a setup to gain a number of pips?

That seems very sensible to me. My only advice would be to have an idea of where you think you’re next likley to meet resistance to your trade before you enter and use that as your risk reward ratio. Of course don’t worry about getting out early if need be or letting it run if you think you can, just like you have been doing. Having some idea of where the trade will roughly go will help you decide if it is worth the risk.

Risking more than you stand to gain will kill you, UNLESS you have a consistently reliable strategy with a WIN-LOSS RATIO much larger than 1:1.

• Example 1: Let’s say that your strategy has a proven track-record of 70 winning trades out of every 100 trades. And let’s say that your average winner is +20 pips, and your average loser is -30 pips (as in your question, above). This strategy offers positive expectancy; that is, it will produce consistent profits over the long term, so long as you maintain your 70:30 win-loss ratio, and your 3:2 risk-reward ratio.

• Example 2: Suppose, instead, your strategy has a track-record of 55 winning trades out of every 100. And let’s say that your R:R ratio remains at 3:2 (risk greater than reward). Now, you have a losing system. That is, your system (strategy) has a negative expectancy.

Here’s the formula:

[B]Expected profit (or loss) =

(Number of winning trades) x (Average winner) - (Number of losing trades) x (Average Loser)[/B]

• In example 1, Expected P/L = (70) x (20) - (30) x (30) = 500.

• In example 2, Expected P/L = (55) x (20) - (45) x (30) = -250.

For this strategy, any win-loss ratio lower than 60:40 would produce overall losses, long-term.

If you are just starting your forex trading career, you probably do not have a tested and proven strategy, with a track-record of consistent wins. For you, it’s important that you NOT use reverse risk-reward ratios.

[B]DO NOT try to dictate to the market what the probable risk and probable reward will be on any trade. Let the market tell you those probabilities.[/B]

Here’s something I wrote recently on how to determine stop-losses and profit targets — 301 Moved Permanently

Just to be clear, Clint means Win%:Loss% is much larger than 1:1, or to state it in another way, you have many more winning trades than losing ones.

Risk/reward is useless if you don’t know your win%.

(Number of winning trades) x (Average winner) - (Number of losing trades) x (Average Loser)

To express that another way:

Expected Return = (Win% x Average Win Gain) - (Loss% x Averge Loser Loss)

Thanks everyone,

I I had a lot of winning trades, but I tried to conform to a set risk vs reward of 3:1 or 2:1 and I can’t seem to find the right method. I seem much better at predicting movement and points of resistance even if it’s a few pips than finding big moves.

I am not doing bad, but I would really like a forex buddy to share trade setups with… Anyone interested?

Nice people, and thanks
Since im really new to forex im trying to focus on really sure trades using few pips, so far im doing pretty well.