Trade Management & R:R ratio

I want to get comments on Trade Management. In particular as it relates to R:R ratios.

Common suggestions in this area are to accept no less then 2:1 or 3:1 Reward:Risk. The problem is a lot of times a trade will run out of steam before getting to 2:1 or 3:1 and a trader ends up stopped out at a loss when he could of had a small winner. A trader may decide to close trades at 1:1 but then you lose out on the bigger winners that do hit the 2:1 or 3:1 targets.

The middle ground suggestion is to close half the position at 1:1, set stop loss to break even and either hold until stopped out or the trade hits the next target. Or trail the stop as price moves further into the black until stopped out.

I rather like the middle ground method. However I was a bit concerned that this sets up an inverted R:R for trades that only hit the 1:1. If I’m trading @ 10 bucks a pip and my stop is 10 I risk $100 but when I close half at 1:1 target I’m only getting $50. If the trade does not continue in my favour the R:R on that trade was inverted.

Any thoughts or suggestions on this ?

My first suggestion is to find a trend following strategy, this will give you 1:2 risk to reward.

If you can’t do that then the middle ground suggestion is the best in my opinion.

You’re example doesnt make sense btw. You opened a trade risking $100. You closed one half for $50. If you lose the other half then you lose $50. So it’s 1:1. If you win you make a total of $150. so its 1:1.5 which is alright.

But trust me your problem is with the trading strategy, change it.

I think it takes a lot of back testing on your strategy to figure out the best R;R for it. I like to take my profit all at once but I can understand someone taking partial profits too. Really taking half profits and letting half ride is not much different than taking full profit and then taking another trade with half of your winnings. No matter what if you keep trading you’re putting some of your profits at risk all the time. The question for me would be how reliable is that second target and is it worth the risk. That can be different with every strategy.

Appreciate the input. I will experiment some more. I think it should depend on the trade. If I get in at the beginning of a trend then it makes sense to hold the entire trade and trail the stop down to each new high or low. If the trend has been running a while when I enter or it is a reversal/counter trend play then maybe it makes sense to close half at 1:1 and set the remainder to break even.

It sounds to me like you need to practice placing entries and stops. If you’re having trouble achieving +2 RR on a trade then either your stop, your entry or both are at non-optimal levels. My advice is to either practice on a demo account or a forex simulating software like Forex Tester - professional forex training software, simulator and backtester. Your aim should be getting the best entry possible which in turn will allow you to have a tight stop and therefore maximizing your reward potential.

Simply by using limit orders I can achieve a much better entry price. This alone has improved my trading.

Money management is one of the key factors between success and failure. We must apply and own strong money manag. rules to let the winners run with some part of positions open.

Do those really work in FX? I thought that with so much high speed trading and dark pools that using limit orders could result in limited trading activity.
With so many broker dealers taking advantage of the SEC Rule 612, alias sub-pennying, I have stayed away of limit orders, but maybe it is time I tried a few limit order trades.

I’ve never had a limit order not filled. Someone who has been trading larger and longer maybe able to give you some info. To be honest I’m not really sure why you would think limit orders dont work in FX.

R:R ratio is only one metric and shouldn’t be used solely to analyse your trading. You’ll find that different trading strategies/trading styles will yield very different R:R ratios. That’s not to say one particular style will be better than another. It’s simply how a strategy behaves. Take two strategies for example, one is a simple moving average crossover system and another a stochastic based system (buying at oversold and selling at overbought). If you do a quick backtest you’ll find that both strategies will have similar returns (and losses). But their R:R will be dramatically different.

Here is the reason:

A moving average crossover strategy is usually used as a trend-following strategy. The very nature of trend-following strategies is that you will get faked out on many of your trades. You’ll notice trend-following strategies will have a lower win rate, usually in the 25-40% range (this is due to how often you will get false signals). At the same time, the R:R for these strategies are quite high. This is because the winning trades generally make many multiples over your risk (making back the small losses on your false signal entries and a bit more). 2:1-20:1 R:Rs are definitely possible.

On the other hand, a stochastic based strategy is just the opposite. You’ll find that range-based strategies will have a higher win rate (>50%) but the R:R will fluctuate around 1:1. It’s not surprising to see range strategies with 0.7:1 R:R (they are compensated by a higher win rate).

If you want to compare them you’ll find the profit factor for both of these example strategies will be more or less the same. So R:R is nice; definitely helps psychologically, but there’s much more to it.