On r:r it might be worth hearing the story of how banks are so rich - the 3-6-3 rule. This says that the bankers borrow money at 3%, they lend it out at 6% and they aim to be on the golf course by 3pm.
There’s no denying that banking is a profitable business. The r:r using this rule is of course 1:1.
1:1 RRR is the highest ratio to still be profitable from.
A 1:2 RRR only wins 25% of the time.
Exactly. I had this problem when I newly started trading before finally settling for a 1:1 RRR. Even in the youtube vids they always use 1:2 or 1:1.5. At least I have a higher winrate.
I watched a course on how the FX market works and why sites like this and youtube how-to’s promote a 1:3 RRR… liquidity providers actually pay them to teach and they only pay them to teach the correct way. Not saying BabyPips is evil or they’re doing it on purpose, but this: Reward-to-Risk Ratio In Forex Trading - BabyPips.com.
To increase your chances of profitability, you want to trade when you have the potential to make 3 times more than you are risking.
If you give yourself a 3:1 reward-to-risk ratio, you have a significantly greater chance of ending up profitable in the long run.
In the long run… that’s comedical. You can almost hear the market maker telling them the optimal RRR. A 1:3 RRR has a 16.6% chance of winning in the “long run”. We’ve been taught that a 1:3 RRR has a 33% chance of winning. That’s incorrect.
Here’s BabyPips using a 60% win rate example: Win Rate Definition | Forexpedia™ by BabyPips.com.
I can do 60% win rate very consistently… the only problem with it is I have to trade at a 1:0.6 RRR… BabyPips is making it sound that you can achieve 60% wins and still have a 1:3 RRR. Impossible.
i agree unreservedly
decades of experience have taught me that a 1:3 RR is not viable or reasonable or sensible for retail traders, and trying to trade with a high ‘R’ is among the worst advice that can be offered to beginners
BTW guys…*
1:0.6 RRR = 60% win rate
1:0.8 RRR = 55% win rate
1:1 RRR = 50% win rate
1:1.5 RRR = 37.5% win rate
1:2 RRR = 25% win rate
1:3 RRR = 16.6% win rate
1:4 RRR = 12.5% win rate.
I’m not sure why or what the math is behind the outcomes, but over a large enough set, I’ve settled on this % win vs RRR. It’s just so difficult to increase position size on such a small % win rate. I can martingale a 1:1 RRR or 1:0.9 far easier than a 1:3. a 1:3 RRR will only win 4 times out of 25… how many losing trades in a row can you take? Will those 4 wins be enough to make profit?..
*this is assuming the spread has a very small affect on the outcome. Usually <2% of the TP pip amount. Risk events will also factor in, but we don’t know if the event will go in our favor or against, so it’ll be 50/50. We just can’t beat the dealer’s edge of a variable spread.
And again i am the one who swims against the stream. I think it is surely possible to be profitable with an 1:3 RRR or even higher. Like the professor said, it is very challenging mentally, but if you can manage your emotions…
I am profitable with an 1:2 RRR. When i look at my last 100 trades i have a 47,87 % winning rate. I also journal different management method so i can give you the percentages for 1:1 and 1:1,5 also: 55 % and 48,45 %.
What does that say to me? Most of my trades running 1:1 also run 1:2. Nearly every trade that runs 1:1,5 also runs 1:2. And 1:2 is the best RRR at least for me and my trading style. Unfortunately i don’t journal 1:3 anymore. But last time i did 1:3 had a drop in profitability, but it was still profitable.
I don’t get people constantly insisting that something is not possible…
The win ratio needs to be examined in relation to the size of the winning trades vs. the size of the loosing trades. If you win a lot on every winning trade and loose only a little on every loosing trade, the win ratio becomes less important.
The one thing that I have grasped from my few years experience in trading is that, one got to learn everything there is to learn about the industry and then unlearn it. The reason why you must unlearn it is because you would realize that its all garbage. The real gold is hidden in the way you perceive the market.
Not to say I have made it in trading, but I can assure you that I only became an above BE trader when I ditched all the nonsense people teach out there.
If you trade for decoration i.e (RRR and winrates) you will always bang your head onto the wall with frustration.
I always have a field day when I hear people bragging about so called 'sniper entries, massive RRR and win rates). If you follow such people closely, you are always hit with a sales pitch just a few steps along.
The holy grail lies in where to place your T/P for every trade. That is your mission as a trader. Follow S&R zones, maybe also S&D in a trending market.
I have a 55% win rate with this strategy.
Hi,
You have highlighted one of the most fundamental decisions a trader needs to make, and that is more to do with trading psychology than plans. A trader should never make a fixed R:R the reason to trade. He should look at the maximum loss he is willing to make when he puts this trade on, and his exit strategy should look for a minimum net profit acceptable for the trade. Market volatility has a lot to do with this, and if the market in ranging, not trending, that makes the psychology all the harder to maintain. To make money in markets they need volatility. And you need plans that can change between bull markets, bear markets and ranging markets. Everyone seems to think there is some Holy Grail set up and execution that works in all markets. Sorry to disappoint you - it doesn’t exist. 
And again i am the one who swims against the stream. I think it is surely possible to be profitable with an 1:3 RRR or even higher. Like the professor said, it is very challenging mentally, but if you can manage your emotions…
I am profitable with an 1:2 RRR. When i look at my last 100 trades i have a 47,87 % winning rate. I also journal different management method so i can give you the percentages for 1:1 and 1:1,5 also: 55 % and 48,45 %.
What does that say to me? Most of my trades running 1:1 also run 1:2. Nearly every trade that runs 1:1,5 also runs 1:2. And 1:2 is the best RRR at least for me and my trading style. Unfortunately i don’t journal 1:3 anymore. But last time i did 1:3 had a drop in profitability, but it was still profitable.
I don’t get people constantly insisting that something is not possible…
You’re trading equity indexes. The DAX was +13% January-March. You’re swing trading with leverage and you were +11%. Just buy and hold next time. You won’t have to worry about RRR. Januray DAX was +9%… If EurUsd can go up 9% a month, I wouldnt be talking about RRR.
This is Forex. Unbiased pairs, where the entry level does not matter in an efficient market. If you buy the ask and sell the bid, the market market has the edge.
Show me 48% on 1:3 R:R trades…
Unfortunately i don’t journal 1:3 anymore. But last time i did 1:3 had a drop in profitability, but it was still profitable.
I don’t get people constantly insisting that something is not possible…
Sounds like you just got tired of being rich, or you’re wrong.
I’m not understanding loosing and a loose trade. You get loose when you are loosening a trade? Or do you mean losing a trade and taking a loss? How do you spell “Win and Lose”? Are you putting an extra O in certain words?
In completely random entries, I achieve exactly 55% win rate at 1:0.8 RRR over a long enough sample set. It’s just more difficult to adjust position sizing at a negative R:R ratio. I find 55% wins and 50% wins have almost the same distribution of wins and losses.
I talk about distribution of W’s & L’s because that is what will take you out. The 50% strategies I’ve ran max out at 4 consecutive losses. I adjust position sizing to be able to handle 6 losses in a row before the account is blown. The 60% win rates I’ve had rarely produce more than 3 consecutive losses, so I would like to conform position sizing to handle 5 consecutive losses before the acct is blown.
There is no holy grail in straight beating the market. If the market pricing is efficient, then current price will not matter. Since we pay the spread, we are not able to profit from a 50% win rate and 1:1 R:R. It is possible to find a strategy that wins 48% of the time with an even distribution of wins and losses, you’ve found an edge.
ie; A strategy in 40 trades that wins 19 times and loses 21. Find one that distributes those Wins and Loses evenly, just double the position size after every loss and you’ll double accounts more often than not.
Is 3-6-3 an urban myth? Maybe.
But as good as the story of the fund manager who, after he retired, wealthy and feted, was asked what was the secret of his success. He replied that when he drove into his office each morning, if he had more green lights at junctions than red lights, he would have his traders buy: if there were more red lights than green lights, he would tell them to sell.
Did he do that? Or was he just joking?
I have a 50/50 win rate on 1:1 R:R trades. I could trade the opposite way on all trades and still get the same outcome.
Price level on trade entry in an efficient market does not matter.
