Well with 10 pip gain, you need the winning percentage to be greater than 80% winners for a small gain, and with 5 pip gain you need 89% winners for a small gain. In the beginning I tried to do what you did, but it did not suit me. I think only through experience you can choose what works the best.
(1) risk x losing % relative to (2) reward x winning % so
now this is just to find the break even of course and you just set (1) = (2)
The proper formula though is:
risk(# of pips) x (1-winning probability) = reward x (winning probability)
I probably made it a little more complicated then it is, just in case you need an example to find it, I’ll use the 10 pips win vs the 40 pips loss.
risk = 40 and reward = 10, just set winning percentage equal to x.
40(1-x) = 10x
40 - 40x = 10x
40/50 = x
x = 0.8 = 80%
and this is what percentage of winners you need to break even, so it has to be greater then that. That’s usually why you want your winners to be greater than your losers, since you can tell by using the formula, you get more profit that way on alot lower winning %. Have a good one eh!
Good topic. I�ve seen similar questions bandied about recently and I�m sure there are professionally prepared explanations of how to gauge this on the web. We can use commonly known formulas that system writers employ in order to estimate the viability of a trading method. It may be most helpful to attempt to estimate a R:R ratio guideline based on your individual experience.
As Shadow’s post demonstrated based on the information you gave, you’ll need to be just a little less than perfect to make a profit. Work through this example with me and decide if you wish to go forward with the system you’re currently using.
I’ll approach the problem from a slightly different angle. I would start with this question: �How much do I need to make on my winning trades to [U]at least break even[/U] over time?� If I know how often my set-ups result in gains, and I know that I lose the same amount on each losing trade (this is the R: value) because I use stops cough, cough, then I can calculate the ratio necessary to break even over time.
Samle break even calculation:
For this example, we can estimate a winning trade rate of 30%
Target Reward for Break Even = (1-win rate) / win rate
Target Reward = (1 � .30) / .30
TR = .70 / .30
TR = 2.33
This formula suggests that you need a [U]R[/U]:R of 1:2.33 to break even. Let me say that another way. If your system only generates winners 30% of the time, and you have defined your loss as [U]R[/U]: on every trade by rigidly applying stop losses, then you need to have winners run up 2.33x�s the amount of your losers. That will get you to the break even point�before slippage, spreads, and negative carry. Sigh
Well, if you�re like me, you didn�t embark on this trading adventure to break even. So join me as we boldly go where no newbie has gone before and further complicate the discussion. Set your phasers to �vaporize.� (Sorry � just watching old star trek episodes. )
In my experience, rarely do I realize the full potential of a trade. In fact, my exits are frequently very early and I almost always leave money on the table. Since that�s the case, if my system�s results are similar to the example above, then I will [U]fail to break even[/U]! (It sounds better than: LOSE. Don�t you think?) So, to avoid losing over time I need to make an adjustment in the R:R ratio. I can accomplish this by dividing the break even R:R calculated above by the percentage of the targeted gain that I [U]actually capture [/U]on average.
Go back through your trades and record the average percentage of your estimated reward target [U]actually realized[/U] on your winners. That is, if you thought the trade would gain 100 pips, but your actual realized gain was only 60 pips on average, then your average reward target realized percentage is 60%. Now take the R:R ratio you calculated in the first example and divide it by this percentage.
So: 2.33 / .60 = 3.88 :eek:
That would seem to indicate that a system winning 30% of the time and capturing 60% of the target reward would need a R:R of 1:3.88!
Maybe we should only have set the phasers to �stun��
See any holes in this? Have a clarification or an idea to add? There’s more here…