Hi Guys,
I am considering reading the Book “Trading in the zone” by Mark Douglas after looking at this thread (as I was wanting to get a couple of books on the subject)… I was reading a review of it here:Book Review: Trading in the Zone by Mark Douglas and it said:
Some claims (like the “ideal 3:1 risk-to-reward ratio”) are not supported by any evidence. Maybe that is just a part of the overall pseudoscience entourage or something.
Is that true? I thought RRR 3:1 was a good idea?
The more I read, the more inconsistences I find in advice and perspectives from “Experts!”
This is exactly what I discovered recently. A real eye opener.
What do you think the win probability % is of a 1:3 Risk Reward ratio?
Hi, different RRR is a good idea when you are trade via portfolio of strategies. Regards Greg
r:r is just one criterion on trading and if you alter r:r, you alter everything else at the same time without consciously wanting to.
So as @EmeraldEyes says, if r:r is raised, win rate falls. So does frequency of trade opportunities. So does total trades per year. So does total capital loss. So does average capital loss per trade.
A real problem but unquantified for private retail traders with limited capital is the length of time holding a trade which is not hitting SL but which is not reaching TP either. This is sometimes overlooked in textbooks etc. when the author says look at these 20 consecutive perfect entry patterns on XXX/YYY - if you’d taken all these you would be now up 100,000 bucks. But can you risk or afford to run 12 or 13 or 19 or 20 simultaneous XXX/YYY positions? And would you want to?
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Correct, time in trade ie very large SL will lower returns. The RRR is what it is. I backtest the past year in a security, using various SL distances by looking at the Daily Range (ADR) and starting with that amount as the SL.
In a trend market, the T/P is the most critical, which should be estimating where the order flow price action could reach. Mostly before a S&R zone where losing traders close their trades or get stopped out.
Winning traders have the luxury of sitting tight to see what happens. Once the T/P is in place the S/L can be placed with anough breathing space to resist a small retracement on the journey to profit.
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It’s funny you mentioned this. I’ve noticed this a lot with my own trades. This is the difference between sitting back and withstanding any bizarre retracements as opposed to getting stopped out on the first pullback, then suffering losses trying to get back on the trend.
It’s important to pay attention, and be brave to jump in at the right time. If you enter late because you were nervous about losses, you could be creating even more losses with a late entry. This is something that I’m still dealing with.
@steve369 If you miss your ideal entry, do you try to get back on the trend, or do you let it go?
And I agree, get your TP set, but the biggest question is what do you set your SL at.
Too small and you miss through sporadic retracements. Too high and you add too much risk.
I figured you would set your tp, then /3 to get your appropriate SL but it’s not as simple as that, as often times, that’s not enough breathing room. An almost 1-1 RRR seems to be give enough wiggle room.
How do you guys pick your SL?
I have enough patience to wait for a suitable entry point.
For me i usually try to get a high R/R/Reward like an example using 20% OF Daily ATR for my stop loss and profit target is from Fibonacci entrancement and extension . So my R/R/R IS sometime between 8 and up to 22.5 depending on the pair on lower time-frame.
So you think that making your take profit to be 3 times your risk is a good idea?
So for example if you buy at 120.20… and after your analysis, you decide to put your stop at 120.00, no Matter What happens… no Matter how is the price action behaving, your are going to have a fixed stop at 120.80?
And this Will Make you profitable?
For me and my trading style i know where i want to entry and my stop is base off my ATR so let’s say daily atr is 200 my stop loss for me on lower time frame is 40 pip from 100 level of fibonaccii
Is there a general rule of thumb by the community then? I get the impression having a sensible informed S/L and T/P level is more important than being restricted by some static RRR(such as 1:3)? Agree?