ePayments1 468x60
Results 1 to 8 of 8
Like Tree1Likes
  • 1 Post By newdigital

Risk to Reward Ratio

This is a discussion on Risk to Reward Ratio within the Forex Trading forums, part of the Trading Forum category; I wanted to start a thread for this topic as I think it's worth of discussion. In technical analysis we ...

          
   
  1. #1
    Junior Member
    Join Date
    Aug 2013
    Posts
    14

    Risk to Reward Ratio

    I wanted to start a thread for this topic as I think it's worth of discussion.

    In technical analysis we start off by learning that your winners should be X times your losers. So say that your stop is 30 pips, your target should be 90, which is 3 times. This way with a lower win ratio, over the long run you should be ahead. That's the theory that I've heard anyways.

    However, reality it seems is quite different. From different EA results and trading performance, I notice that the successful ones always have a larger stop vs the target and rely on a high win ratio over the long term. I haven't seen an EA that has a small stop, large target and lower win ratio which looks profitable over time but do find the opposite case. When you think about it makes sense that with a higher stop loss and lower target, just by probability, your target has a higher chance of getting hit regardless of how you enter. As for example, if we use a target of 30 and stop of 90, then chances are that the market is more likely to move 30 pips one direction than 90 pips.

    So I'd really like to hear your opinions about this topic as which is the best solution for the long term results.

  2. #2
    Administrator newdigital's Avatar
    Join Date
    Feb 2013
    Posts
    9,830
    Blog Entries
    1562
    Follow newdigital On Twitter Add newdigital on Facebook Add newdigital on Google+ Add newdigital on MySpace
    Add newdigital on Linkedin
    Yes, you are right. But this 'story' about large stop and small target is mostly related to price action systems/EAs. I mean - if EA is working on breakout and so on.

    Besides, the traders are affraid to place small stop because of spikes of data (made by brokers).

    And most important thing is the following: traders/coders are more relying on trading system itself than on some settings/parameters such as stop loss or take profit.

    Example: if we need to place small stop so we can easy "martingale" this stop so - when the stop hits - EA will not close this trade : the other trade will be opened on same direction but with more higher lot size.

    There are some other ways "to avoid" stop loss.

    So, for now (as far as I see) - the traders rely/trust on trading system itself more than on the settings.

    This is my thinking.
    Premium Trading Forum: subscription, public discussion and latest news
    Trading Forum wiki || Social networks for the forum
    Trading blogs || My blog
    ePayments: premium subscription without paypal

  3. #3
    Senior Member matfx's Avatar
    Join Date
    Sep 2013
    Posts
    894
    Blog Entries
    103
    Follow matfx On Twitter
    It is very difficult to get a risk : reward ratio of 1:3. Only a few good "trading strategies" really works on it. From i get most of the time one to one, depending on market moves and which time frame.

  4. #4
    Administrator newdigital's Avatar
    Join Date
    Feb 2013
    Posts
    9,830
    Blog Entries
    1562
    Follow newdigital On Twitter Add newdigital on Facebook Add newdigital on Google+ Add newdigital on MySpace
    Add newdigital on Linkedin
    What You Need To Know About Your Trade Position Size Strategy



    Talking Points:
    -Why Traders Need to Focus on Position Sizing
    -Martingale vs. Anti-Martingale Technique of Position Sizing
    -Can You Maximize Profits By Adding To Losses?

    [/CENTER] Do you think if you’ve unfortunately placed five losing trades in a row that the next one is due to be a winner? If so, you’re likely prone to overleveraging that 6th trade, thinking it will be profitable. If it becomes a loss again, you will soon find your promising Forex career coming closer to an unnecessary end. Instead, it’s best to focus on calming potential frustrations as a trader and not place too much emphasis on one trade unless it’s winning big, in which you can look to take advantage of adding to that trade at opportune times.

    Why Traders Need to Focus on Position Sizing

    With a relatively fixed account balance to start trading any market, you must focus on the position size you will have on each trade. You’ve likely heard the phrase, ‘cut your losses short and let your winners ride,’ but many traders make a key mistake. That mistake is that they often add to losing trades trying to buy the bottom in a downtrend and do so with more leverage which is effectively known as the Martingale approach.

    Many successful traders have a few key components of their trading strategy in common. For example in the book, Market Wizards, by Jack Schwager, most successful traders feel that any person can place a winning trade, but unless you can control risk, you have little chance at overall success. Here are some of my favorite quotes:

    "You have to minimize your losses and try to preserve capital for those very few instances where you can make a lot in a very short period of time. What you can’t afford to do is throw away your capital on suboptimal trades."-- Richard Dennis

    "Risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice. Whatever you think your position ought to be, cut it at least in half."-- Bruce Kovner


    Also interviewed in the book of
    Market Wizards, Dr. Van K. Tharp discusses the mental aspect around making decisions in controlling risk and reducing trading risk. Those are simply a few examples of many other traders who have come to realization that in due time, managing your position size to control market risk becomes more important than what triggers your entry into a trade. When we analyzed over 12,000,000 live traders in our Traits of Successful Traders report, we also found that position size / leverage were a key component of overall success.

    Learn Forex: Position Size & Leverage Are a Key Determinate of Your Success



    Martingale vs. Anti-Martingale Technique of Position Sizing

    There are two common position sizing systems that you should know about so that you can avoid one and consider the other. The most popular system is known as the Martingale, whereby you add to a losing trade in the hope of lowering your average entry price which requires a smaller move in your favor to break even. The Martingale entries are usually staged at fixed increments of 50 or 100 pips but as you’ll soon see, one small trade can soon wipe out your account.

    The other system is known as the Anti-Martingale. An impressive number of fund managers and successful traders utilize the Anti-Martingale whereby you add only to winning trades. The Anti-Martingale takes on the assumption that adding to a losing trade will drain your account and you should only look to capitalize on a winning streak or trend and thereby, ‘let your profits run and cut your losses short.’

    When you’re in the heat of the moment, the Martingale system feels like such an approach would work. However, from a mathematic model perspective, the Martingale leads to sure ruin eventually and all it takes is one strong trend that you’re on the wrong side of. Here’s a breakdown of the volatile equity swings that can take place when an account employs the Martingale system.

    Learn Forex: Sample Account Which Increases Trade Size Only To Losing Trades


    This example shows a profitable example but it’s helpful to think on this question. What would happen if you had a string of 10 losing trades in a row? It could happen and if you were adding to each loss of 100 pips hoping that it would eventually turn around, then you could be facing
    a Margin Call due to the inherent fallacy of this strategy.

    Learn Forex: Sample Account Where Martingale Meets String of Losing Trades



    You can easily get into trouble with the Martingale approach when you think that a trend can’t continue. Of course, it wouldn’t take long to find multiple examples of times when an imbalance in monetary policy caused a huge shift in the market and a new trend is born. Here is a recent example of USDCAD which pushed 650 pips in a few months without retracing more than a hundred pips on its push higher until recently.

    Learn Forex: The Recent USDCAD Trend Shows How Quickly the Martingale Can Blow-Up



    This argument against the martingale approach whereby you add to losing trades begs a simple question. If this system is so popular, is there any situation where it does work? In my experience, there are two scenarios where Martingale can work. In a strict range bound market, it can work well but one breakout out of the range against your positions will wipe you out in due time. The second scenario is if the trader has unlimited capital.

    Can You Maximize Profits By Adding To Losses?

    Adding to your losses is a harmful strategy that can work in the short-term but has a very poor long-term track record. If your trade is losing, the most likely scenario is that your analysis was off or your timing was off but either way, it’s costing you money to stay in the trade and the best move is to exit the trade until the waters calm and you can make sense of the overall landscape. To grow your account, you should be advised to focus only on trading in a way that has a mathematical probability of growing your account and not trading to prove that you’re smart. If you take your trading beyond the p/l and make a winning or losing trade as emotional validation, then you could quickly become a martyr of your own faulty analysis.
    Premium Trading Forum: subscription, public discussion and latest news
    Trading Forum wiki || Social networks for the forum
    Trading blogs || My blog
    ePayments: premium subscription without paypal

  5. #5
    Member MusicUK's Avatar
    Join Date
    Mar 2013
    Posts
    77
    Blog Entries
    97

    Identifying When To Let Your Forex Trades Run Towards Bigger Profits

    For every hundred traders you come across who trade in short time frames, you may find two who are making a profit worth mentioning. The rest are struggling trying to figure out why they canít seem to get ahead. The reason is simple to figure out if they would slow down and think about their strategy for a moment.

    Despite the fast pace of the Forex market, a trader needs to show some restraint and a lot of patience. One way to do this and increase your probability of overall profits is by looking at the bigger picture and paying attention to those longer time frames.

    Risk to Reward Ratio-1.jpg


    Trading With Time Charts

    Time charts are a great tool for the trader who knows how to read them. What they do is take the rapid movements of the Forex market and average it out over a set period of time. This allows you to better see what the market is doing and which way the trends are moving.

    To take the best advantage of this tool, you should be focusing on multiple time charts at the same time. Short term averages, such as four hours, will help you identify good entry points, while studying the average over longer periods of time will show you how the currency is trending and where the support and resistance lines lie. When you can identify these components you should be able to spot an opportunity to enter a long running trade as opposed to jumping in and out of shorter ones.

    When looking at two different time frame charts, the prevailing one is going to be the longer one. An hourly time frame may show a trend going in one direction, but when you look at the daily chart you could see that overall, it is heading the opposite way. The longer time frame chart is going to be more accurate at showing you the direction of trends, and the one that you should be basing your long run trades on.

    What you are waiting to find is a trend that is continuing in one direction for a significant amount of time. There may be small moves in the opposite direction, but overall the movement is in one direction. During an uptrend look to see if new highs are being met every day. If so, than this is a good opportunity to place a longer running trade. In a downtrend you will of course be looking at new lows.

    Combine the information you glean from the time charts with a risk to reward ratio that supports letting your money ride a long term trend and you increase your potential gains exponentially.

    The Importance of Risk to Reward
    Even traders who are right a significant percentage of the time will lose money overall if they are not managing their risk to reward properly. What will happen is that they end up losing more money on those trades that went sour than what they gained on winning trades. To avoid this you should be trading some of your currencies for long term results.

    This means that instead of the conservative 1 to 1 or even 1 to 2 risk to reward ratio, you set your limit higher and use a 1 to 3 or 1 to 4 risk to reward ratio. This is done on those trends you spot that are heading in one direction for long periods of time. The longer you stay in the trade during those long running trends, the higher your profit will be.

    The Lagging Exit

    Trading with lagging exits goes against the traders desire to pull out of a trade right before or just as it begins to reverse. The trouble is, it is nearly impossible to predict that exact moment or price, so traders will pull out just before they think this will happen, only to find out that the trend continued in their winning direction. This so-called winning trade is now looked at as a missed opportunity as it continued to climb after your exit, costing you the chance for a higher profit.

    To use a lagging exit strategy, you actually have an open ended limit and pull out from the trade once you can confirm the reversal. You will lose some pips if the reversal happens very quickly, but that is nothing compared to what you could have lost in profits had you pulled out too soon.

    This strategy will only work for those traders who can show great restraint in the market. Greed will make most new traders pull out of the trade before the reversal out of fear of losing a portion of those profits they have gained. You have to make the lagging exit strategy a part of your plan and then have the restraint to stick to it.

    Risk to Reward Ratio-2.jpg


    While the idea of cutting your losses and letting your gains ride should seem like common sense, the reality is that human nature is to do the complete opposite. Cutting your losses means admitting defeat and wounded pride. Letting your money ride goes against the gut instinct to get out while the getting is good. To combat those instinctive feelings, place your stop-losses and limits and let the market take over.

    When that time finally comes where you can stop micromanaging every trade and let them run, you will find that your profits are finally beating out your losses and your Forex account is reaping the rewards.

    the source

  6. #6
    Administrator newdigital's Avatar
    Join Date
    Feb 2013
    Posts
    9,830
    Blog Entries
    1562
    Follow newdigital On Twitter Add newdigital on Facebook Add newdigital on Google+ Add newdigital on MySpace
    Add newdigital on Linkedin
    Risk/Reward Ratio - indicator for MetaTrader 4

    Risk to Reward Ratio-rrrx0_1.gif


    This code help to decide fast what trades respects your ratio requirements.

    First Version: Red Line = StopLoss and green = TakeProfit. The calculations are made based in the bid value.

    Version 0.1 = we can decide if the open position is the bid value or specify the open level. Legend added.
    Lerxst likes this.
    Premium Trading Forum: subscription, public discussion and latest news
    Trading Forum wiki || Social networks for the forum
    Trading blogs || My blog
    ePayments: premium subscription without paypal

  7. #7
    Administrator newdigital's Avatar
    Join Date
    Feb 2013
    Posts
    9,830
    Blog Entries
    1562
    Follow newdigital On Twitter Add newdigital on Facebook Add newdigital on Google+ Add newdigital on MySpace
    Add newdigital on Linkedin

    Money management Risk/Reward - script for MetaTrader 4

    XIT_BuySellAutoStoploss - Stoploss set from Fractal Levels, Money management Risk/Reward - script for MetaTrader 4

    Risk to Reward Ratio-options.gif


    My main goal here with this script was to help improve my win ratio, by setting my stoploss at fractals with the best support. I had been using fixed stoploss values, and kept having the stop hit and within minutes the price went back into the correct direction. This script has really helped me spot out recent support/resistance levels, providing good stop levels.
    Premium Trading Forum: subscription, public discussion and latest news
    Trading Forum wiki || Social networks for the forum
    Trading blogs || My blog
    ePayments: premium subscription without paypal

  8. #8
    Senior Member mql5's Avatar
    Join Date
    May 2013
    Posts
    1,633
    Blog Entries
    512

    Reversing: The holy grail or a dangerous delusion?

    Reversing is a type of martingale. Such systems suggest lot doubling after a losing trade, so that profit could cover previous trade's losses in case of success.
    Risk to Reward Ratio-eurusd_adx.png


    Table of contents
    Metatrader 5 / Metatrader 4 for MQL5 / MQL4 articles preview preview
    Trading blogs || My blog

Tags for this Thread

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •