Why we are taught to set risk/reward ratio larger than 1

[Mongoose]

Speaking of Round Numbers what better opportunity to short the AUDUSD as when it approached .7000. Perfect DOJI at .6998 just before that a hanging man at EXACTLY 7000.

A nice few pips there for less than 15pips risk each.

Mongoose

[vikingtraider]

Originally posted by Mongoose
Speaking of Round Numbers what better opportunity to short the AUDUSD as when it approached .7000. Perfect DOJI at .6998 just before that a hanging man at EXACTLY 7000.

A nice few pips there for less than 15pips risk each.

Mongoose

that's pretty interesting.. i wonder if there are a lot of forex traders who trade using clestick style theory on an intraday basis..

i find that clestick style trading is not very good although i haven't really tried it for a prolonged period of time. The risk / reward doesn't seem good value in my opinion...

[eternalfuture]

Vikingtrader

Clestick charting rely heavily on chart pattern recognition. I sometimes use it as a complementary tool to my analysis.

I recommend you to take a look at Steve Nison's books about clesticks analysis.

One thing that I can say about clesticks is that it is a pretty slow in giving signals. It took some time to confirm a pattern to be successful.

Cheers!

[dirk]

What I don't underst of all this is next : you want a 75 pips profit want only a 25 pips to risk if you ask me 3 times out of 4 you will get stopped out for sure so you will make no money at all will somebody have the skills to be stopped out 3 times out of 4 still believe in his fourth trade "hoping" this will be the good one?
I'm working completely different my system's accuracy is about 70% somethimes even more when I got a signal on the 10 min chart i take it put in a 40 pip stop in the next 30 min if the signal was really good the 30 min would give me a signal in the same direction if it doesn't give a signal i simply close the trade.
So I move on up to the 4 hour chart (if it give signals up to there) so once a week i make a 150-200 pip trade rest of days i'm taking small profits also losses.
Average monthly pip gain is around 400-550
Risk reward most of the week smaller the 1 once a week(most weeks)3 up to 5 to 1.
Think about it.
Any comments?

[vikingtraider]

I think what you are suggesting is that the movements are rom.. if they are you are probably correct?

Also it is highly dependant your system the way you trade. Eg I don't use any indicators at all. We Australians like to trade on a plain chart

Your system is very interesting... what p do you normally trade?

I trade mostly the aud/usd for that p i get on average just slightly less than 50 pips / week.. obviously a lot to be desired improved on..

[dirk]

Most of times USD/CHF

[rezo_s]

Dear BLUSKY thank you for participating it is really a pleasure.

First of all you are right: of course it is not a set 1:3 or 1:2...no way...this is funny. Lets say if I see stop is 50 pips it doesnt mean I automatically say "oh ok - then I target 150 pips"
My risk reward varies 1:2 to 1:5...it all depends on target I see the potential I estimate trade to move. I may even take trade that has 1: 1.8 ratio but for less I wont settle...I REALLY do pass trade signals sometimes due to poor r:r...

I see you have completely different agressive aproach trade both intraday longer? I admire people copmbining these 2 styles to achieve better results. Still after 6 years I am not givving up an idea of developing intraday aproach to help me improve my performance. I see many things in intraday observation of the market it is a shame I dont benefit of it. I hope I find some time in near future to set up another (hopefully this time profitable) intraday system test it hopefully to add to my trading style afterwards...
Keep it up.

I agree with Mongoose as well - of course most of trades dont even get close to estimated targets...
My number sts around 8% - 9% of trades hitting initial target. taken that my avg target is +200 pips it it is not bad. that number looks even better if we take in account that average r:r ration sts at 1:3 (well its 1 : 2.9... so its almost 1:3) taken than trades are distributed as:

losing trades 33%
profitable trades 28%
breakeven trades per month 39%

you are absolutely right on issue of high ratio being survival criteria in the long term.

2 dirk:

I'm working completely different my system's accuracy is about 70% somethimes even more

I dont get is? it is or 70% or little more but how can it be "sometimes even more"? Your number should be based on past performance so how can it be sometimes even more? Lost you a little here.

So what you say? you do not apply r:r ratio? do you set up a stop? or what you say is: you do set a stop but profits are taken according to how it goes - it may be a short may be a longer term trade? Well as I said before in my post if system provides good % of true signals rest numbers are good as well risk reward may even lower than 1 this aproach will be profitable in the end...i.e. with really good % data one may ignore risk reward figures purely follow signals only adjusting stops...unevitable possibilities for trading style variations are out there but as long as one is profitable (over proven period of time of course) its probably better for one to stick to THE approach

cheers

Once again thanks to all for participating. Indeed very useful discussion...

Good Trading !

Rezo

[James]

My 2 cents worth:

Risk should be measured in at least 3 ways.

First there is the monetary risk which you expose yourself to in the trade. This can be measured in terms of dollars percentage of equity or such-like. In a classic case of a clear up-trend for example one should buy as close to S/R levels as possible in order to minimise this component of risk. These levels can be defined by whatever system you use to trade such as horizontal lines trend lines Fibonacci levels moving averages or over sold oscillators. Naturally the closer you can get to these levels before buying the lower your monetary risk is before you know you are wrong.

Secondly the risk/reward value is important. I try to risk less than one half to one third of the projected gains of the trade. The projected gains are measured by the distance to the next resistance level once again determined by your system using indicators as above.

The third most overlooked ( most difficult to calculate/estimate) component is the probability of being wrong. In a hypothetical ( impossible) case of an “un-breakable” level being determined one could use a much larger % risk much lower RR ratio still have a much lower risk on the trade. For example in an uptrend where a particular support level is so strong so obvious one could enter the trade say 100 or 200 pips higher up with stops well below the determined support level. This higher entry would have to be justified by other reasons of course or it would be foolish. The risk on this trade in terms of % or RR ratio may be high but the chance of being stopped out below the major support may be very low. Multiply the three factors together you may come out with an acceptably low number prompting you to enter the trade.

The difficulty is in determining this elusive third risk factor. Of course no levels are unbreakable often when they seem that way that’s when they break! The point is though that the probability of being wrong can sometimes be low enough to allow higher risk% lower RR ratios.

Best case scenario is when you can trade close to a really strong support level with a clear trend with high projected gains a low probability of being wrong. These scenario’s unfortunately are rare forcing traders to make “less than perfect” entries a lot of the time.