What is not right with risk/reward ratio?

[mishak]

Risking $1000 to Get ... Part 2/6
continued here

... please keep risk/reward above 1.

Other people say:
if I have risk/reward ratio to 1:3 set S/L at -25 pips T/P at +75 pips then there are more chances that my stop loss order will be hit because it is closer to the current market price. My stops are triggered too frequently.
Probably I'll better target 35 pips for reward set my stop for 100 pips drawdown. Perhaps I can withst that enough times so that the ps would then go 35 pips into my favor enough times.
Currency p MAY very well fluctuate 35 pips MORE OFTEN than a p would fluctuate 100 pips correct?

they are right
Forex market is not so volatile big moves happen not so often tomorrow you may expect the same price that was yseterday.
Currency prices have tendency to correct themselves return to the level where they were. Look at Euro It started 1.18 declined to 0.82 then was back at 1.19 !
Look at Yen - it was between 110.50 108.50 for two weeks. If I'd bought USD/JPY at 109.50 sit tight for drawdown to 108.30 I could now close at 110.50 for 100 pips profit.

Do the opposite - set stop loss wider than take profit risk > reward. sooner or later you'll collect you money. (mishak do not recommend this)

But Forex market is trending very often. If you keep stoploss too far you could be wiped out completely of the account.

Hmm... But look
If you are playing head (not shoulders ) tails there is more chances you throw three heads (or tails) in a row than 10 same in a row.

Yes it is right
However (good for us) the Forex market is not so simple like throwing a coin.
Forex prices do not move at rom do they ?

Ok ok...
But I am a beginner I have no idea where the price will go on the next moment.
The price movement guessing by a novice is rom !
I believe if I'll toss a coin use narrow profit targets I per better than some of "straaategies" (please no offense intended)

Why none the less we should keep risk/reward ratio > 1:1 ?

to be continued ... here
©MK 2003

What do you think ? Please add you comments

[rezo_s]

Hi Mishak

But I am a beginner I have no idea where the price will go on the next moment.
The price movement guessing by a novice is rom !
I believe if I'll toss a coin use narrow profit targets I per better than some of "straaategies" (please no offense intended)


Why none the less we should keep risk/reward ratio > 1 ?

Well I think in case of romly choosing trades it will not differ much gambling black n red right...?

we all know how many can make living out of gambling.
This is serious here but I dont think we can "explain" to newbies why is it prefered (to say the least.) to trade with >1 ratio...

once/if newbie stops being newbie (s)he will underst...I know I didnt understasnd it back then...
for now best advise is to say "just trust me thats the way it is"...

But again if someone has 80% of winning trades in average his ptofits are not that little compared to avg losses then ratio used may be very well below 1. But I doubt many of us got 8 winners out of 10


©RS 2003

Indeed good topic will be glad to read some thoughts on this...

thank you Mishak Overload

[James]

Simple approach:

1. Stay out of the market "noise" by using stops at least 30-100 pips. Anything less than that you will be stopped too frequently increasing the risk factor.

Risk is a parabolic curve. If your stops are stops too tight then the risk of being hit (inside the noise) is too high. If your stops are too large then the risk of % loss low RR ratio are too high. Find the bottom of the parabola.

2. Aim for healthy profits Swing traders should aim for at least 100-200 pips profit to ensure that losses don't gobble up profits. Same thing: parabolic curve...aim for too much - risk of never reaching target too high aim for too little - cannot cover your losses have some profit.

3. Trade as close to important S/R levels as possible aim for the next important S/R level. These levels are normally obvious give logical entry/exit points which will usually allow a RR ratio of 2 or 3 to 1.

This is the basis of my approach it works just fine

[James]

Rules are meant to be broken right?

When I ignore this "simple" approach is when I find myself in trouble...

Far more difficult to control the emotions

[rezo_s]

Originally posted by James
Rules are meant to be broken right?

When I ignore this "simple" approach is when I find myself in trouble...

Far more difficult to control the emotions

TOTALLY agree with you - try to keep things simple. "Just do it" may be one of the best things to say (just do it = just stick to your rules. Do it dont conflict with yourself). the simplier the rules - the better