Whats a good risk reward ratio strategy

Trading Discussion Risk Management Practices
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There you have it, Liberty! The best minds on BabyPips (present company excluded) have given you their 'two cents’
and now the question is back to you: how will you trade with that advice?

Personally, I am going with single pairs, at the moment NZD/USD or NZD/JPY, and I use the ATR on a monthly chart
to set stops and limits, both using that figure, thus with a 1:1 R/R. However, sometimes I may hold a trade for a shorter
period, as it happened with my NZD/USD on Thursday and Friday, and close it before it reaches the profit of the ATR
figure… However, even when trading for twenty-four hours, rather than a few days, or weeks, I still use the monthly ATR on
the NZD/USD or NZD/JPY because they are very volatile pairs and if I used the daily chart ATR I would probably get stopped out a lot.

Having a numerical system for setting targets is a great way to keep trading unemotional and objective, but in the end
there must be an element of flexibility if you can stop giving away profit on a trade if it clearly lost momentum and is
at risk of reversing, for example: this is what trading is, namely reading the information in front of you and being able
to break the rules to minimise risk.

One thing I would say is that I have been cutting down on the number of pairs, and concentrating on about four or five for
watching and one at a time for trading… How has this helped? If you think about how many factors can influence a pair, on both sides, and about keeping up to date with both the fundamentals and the technical picture, together with ‘having a feel’ for changing momentum (i.e. relative volume each day compared to what came before), then how many pairs could you really know intimately well within the time you dedicate to Forex? In my case, as I work full-time, not very much: trading more than one pair, as I have done, means that I start with the best intentions and end up confused, basically almost gambling on hope, based on snap judgements without proper analysis and awareness of the fundamental discourse for those currencies and their paired relationship.

I was listening to PowerTrading Radio yesterday, and Bob Dunn was on air with the host Merlin Rothfeld: Bob Dunn was reminiscing about his former pit days in Chicago and how when you went in you could hear the ‘roar’ of traders… which
has now been replaced by an eerie silence and a lot of machines… What we, as lone traders behind a computer screen,
do not have access to, is that almost physical, almost tangible crowd behaviour that was available to the pit traders of the ‘glorious eighties’, namely, that sound of panic selling or frantic buying to which traders paid close attention in making their own decisions.

All we have, now, are candles/lines/bars on a chart, some lagging indicators, price history, and volume (in certain cases not
even that): not the sound of the other traders shouting ‘Sell! Sell! / Buy! Buy!’ on your particular commodity, index, stock, or currency, but a deafening silence made of images on as screen. It is, therefore, much harder to be a trader trying to gauge
crowd sentiment just looking at a chart, I think, because you are cut off and isolated, and, therefore, much more liable to self-doubt. It is true that crowd behaviour in the stock exchange floors around the world has led to a lot of disasters and broken careers, and that pit-traders have themselves struggled to readjust to the reality of machine-trading: however, as a newbie trader you would be best served by being with other human beings first in that environment, than in going it alone from day one, I think.

So, in terms of risk management, it is natural to have questions when you are completely isolated and you want to ‘play the trader game’… Unfortunately, a lot of us newbie traders have chosen Forex because of the easy way in through leverage, but a lot of us will last very little, or struggle on making meagre returns (I speak for myself, by the way)… WHat we should be told is that this game is not for people with small money, who have no trading experience, and that the time invested in it often far outweighs the return: going by the ‘time is money’ adage, I can honestly say that I could have probably worked an extra part-time job (and made more money from it) if I totalled all the hours spend studying, reading, writing about, discussing, worrying, charting up, and thinking about trading. As someone once wrote on BabyPips, time is the one commodity that we do not factor into our costs when taking up trading: yet time, our biological time, is limited, and as finite commodity we should not be so generous or, even, wasteful with it. How much time are you/we spending on trading, versus the returns?
Would that time be better spent on other, more rewarding pursuits, or with the people we love (e.g. our family)?

The cost in ‘life’ terms, i.e. our biological time, should be included in that ‘Risk-Reward’ assessment, I think, because if
we are losing more time than gaining money, then our trading strategy needs serious restructuring.

Happy trading.

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All we have, now, are candles/lines/bars on a chart, some lagging indicators, price history, and volume (in certain cases not
even that): not the sound of the other traders shouting ‘Sell! Sell! / Buy! Buy!’ on your particular commodity, index, stock, or currency, but a deafening silence made of images on as screen. It is, therefore, much harder to be a trader trying to gauge
crowd sentiment just looking at a chart, I think, because you are cut off and isolated, and, therefore, much more liable to self-doubt. It is true that crowd behaviour in the stock exchange floors around the world has led to a lot of disasters and broken careers, and that pit-traders have themselves struggled to readjust to the reality of machine-trading: however, as a newbie trader you would be best served by being with other human beings first in that environment, than in going it alone from day one, I think.

Absolutely agree buddy. Absolutely brilliant point. It is the reason the journey for many will end in despair. First off the exchanges are now an accumulation of HFT machines that rip off investors and traders on a day to day basis through front running. Not to mention the ridiculous spreads in the FX market space, not to knock FXCM but they claimed to be NDD and ECN all sorts, they had to raise 300m overnight to stay in business… NDD my …

The reality brokers are paid by liquidity providers to execute their orders via HFT firms who front run them in order to make money, banks trade against your position inside their dark pools. Not even multimillion investors are safe everyone is getting taken. Not to say you can’t make money.

WHat we should be told is that this game is not for people with small money, who have no trading experience, and that the time invested in it often far outweighs the return: going by the ‘time is money’ adage, I can honestly say that I could have probably worked an extra part-time job (and made more money from it) if I totalled all the hours spend studying, reading, writing about, discussing, worrying, charting up, and thinking about trading. As someone once wrote on BabyPips, time is the one commodity that we do not factor into our costs when taking up trading: yet time, our biological time, is limited, and as finite commodity we should not be so generous or, even, wasteful with it. How much time are you/we spending on trading, versus the returns?
Would that time be better spent on other, more rewarding pursuits, or with the people we love (e.g. our family)?

The cost in ‘life’ terms, i.e. our biological time, should be included in that ‘Risk-Reward’ assessment, I think, because if
we are losing more time than gaining money, then our trading strategy needs serious restructuring.

I once made the point that it was pointless over exposing yourself to a broker. You need living capital so you can focus and trade full time. No point checking for opportunity after a full day of work after you’ve missed all the days action. So trading part time is not easy. I would never do any project or job that meant I don’t have a 24hr view of the market. I know you make the most of it Pipme in the live market but some others should have a hard and long think.

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Well knowledge, is power the more you know the more you earn the More time spent, the more pips earnd!:wink: Ahah, and I have found a good 1:1/1:2 RR formula that I started following, , and & I find it best to trade just one or two pairs and just focus on other pairs that are correlated with the pairs, your trading, what I usually do before going into a trade is a have a set amount I’m ready to lose the only thing guaranteed, is your loss no matter how good the set up, once I have my amount I’m ready to risk I split it in two trades,

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Finally, remember that in the course of holding a stock, the upside number is likely to change as you continue analyzing new information. If the risk/reward becomes unfavorable, don’t be afraid to exit the trade. Never find yourself in a situation where the risk/reward isn’t in your favor.

25

Good you mentioned that, if you are intraday it is best to focus on one pair. You also have to let the trade breathe, volatility is still the key enemy.

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Basically we need to know first what actually is a risk reward thing.A ratio used by many investors to compare the expected returns of an investment to the amount of risk undertaken to capture these returns. This ratio is calculated mathematically by dividing the amount he or she stands to lose if the price moves in the unexpected direction (i.e. the risk) by the amount of profit the trader expects to have made when the position is closed (i.e. the reward).

Let’s say a trader purchases 100 shares of XYZ Company at $20 and places a stop-loss order at $15 to ensure that her losses will not exceed $500. Let’s also assume that this trader believes that the price of XYZ will reach $30 in the next few months. In this case, the trader is willing to risk $5 per share to make an expected return of $10 per share after closing her position. Since the trader stands to make double the amount that she has risked, she would be said to have a 1:2 risk/reward ratio on that particular trade. The optimal risk/reward ratio differs widely among trading strategies. Some trial and error is usually required to determine which ratio is best for a given trading strategy.

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Good strategy on RR there. Also, when putting the stops and profit targets, sometimes working on a 1:2 works well.i.e 100 pips for profit, 50 pips for stop loss. But of course if you have a certain bias, then you can always leave the target profit open.

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Hi

Isn’t the probably of hitting the TP should be considered when calculating RR?

regards

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The entire “RISK:REWARD” ratio, honestly is a big time waste of time.

1)Your EXPECTED risk:reward ratio is almost NEVER what your REAL risk:reward is.

  1. Due to an ever changing market place, one should be adjusting their tp and sl depending on market conditions.

  2. depending on the system which you are trading, your expected R:R will more then likely be missed or hit.

To sum it up expectations lead to failure more times then none in forex, because almost no ones trading system is based on supply and demand. If it was, then no one would have an expected R:R