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 and 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 and 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 candlestick style theory on an intraday basis..

i find that candlestick 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,

Candlestick 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 candlesticks analysis.

One thing that I can say about candlesticks 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 understand of all this is next : you want a 75 pips profit and 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 and will somebody have the skills to be stopped out 3 times out of 4 and still believe in his fourth trade and "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 and 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 and 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 random.. if they are, you are probably correct?

Also, it is highly dependant your system and 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 pair do you normally trade?

I trade mostly the aud/usd and for that pair, i get on average just slightly less than 50 pips / week.. obviously a lot to be desired and 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 from 1:2 to 1:5...it all depends on target I see and 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 and 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, and 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 and 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 stands around 8% - 9% of trades hitting initial target. And taken that my avg target is +200 pips, it it is not bad. And that number looks even better if we take in account that average r:r ration stands at 1:3 (well its 1 : 2.9... so its almost 1:3) and taken than trades are distributed as:

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

And 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 and may be a longer term trade? Well, as I said before in my post, if system provides good % of true signals and rest numbers are good as well, risk reward may even lower than 1 and this aproach will be profitable in the end...i.e. with really good % and data, one may ignore risk and reward figures, and 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 and most overlooked (and most difficult to calculate/estimate) component is the probability of being wrong. In a hypothetical (and impossible) case of an “un-breakable” level being determined, one could use a much larger % risk and much lower RR ratio, and still have a much lower risk on the trade. For example, in an uptrend where a particular support level is so strong and 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, and 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 and 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% and lower RR ratios.

Best case scenario is when you can trade from close to a really strong support level, with a clear trend, with high projected gains and 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.