18th June 2012 Update -
Question: What benefit was gained from this thread?
Answer: It was a fantastic way to collect together the posters and mutts I needed to add to my ignore list. After a select few miserable sods trailed the discussion through their own fecal matter and diluted any useful content with their diarrhea, a positive result as decsribed above was still obtained.
Note to new readers of this thread: Save your time and just read the first page if it is at all useful to you. It will only take a minute and you are welcome to discard it as trash if you find no use for it. Also keep in mind that this forum is sponsored by, and profits from, brokers and other businesses who (most of which) do not want you to succeed in trading. Lastly, if most people rant and rave about the same old, overhyped methods, and most people lose all their money...any lightbulbs lighting up out there?
The most common belief among Forex Factory Traders is that a 1:2 or higher RR is necessary for profitable trading. People who say this often are under the misunderstanding that there is a 50% chance of the market hitting their SL and a 50% chance of it hitting their target. Well a basic understanding of trading and simple mathematics would show that there is a lower chance of price hitting +20 pips than hitting -10. Many traders think if they can come up with a sytem that has a very slight edge then this 1:2 or higher RR will be what makes them money.
The trouble is they need to have a very strong edge to get a 1:2 or higher RR system to be right 50% of the time, purely because it is more likely that price will hit their stop more often than it hits their target.
So what is another approach to the market for those who do not have a huge edge? A 1:1 Risk Reward Ratio.
If we leave off transaction costs for a moment we can say that a 100 pip stop has about as much chance of hitting as a 100 pip Target. I myself pay about 1.2 pips total transaction cost per trade which is 1.2 % of the 100 pip target. Every win will net 98.8 pips and every loss will net -101.2 pips. So our system needs to have a small 2.4% edge to break even. Anything more than that and we are into profit.
So, finding a pattern to enter on that is right 6 times out of 10, will give a total profit of +188 pips. Being right just 51 times in 100 nets +80 pips.
So we are taking about a system/method that has only a slight edge and bingo, we are making money. A pattern that works out just slightly more often than it doesn't is all you need with a 1:1 RR. So why put all that pressure on to have a massive edge big enough to work a 1:2 RR?
Question: What benefit was gained from this thread?
Answer: It was a fantastic way to collect together the posters and mutts I needed to add to my ignore list. After a select few miserable sods trailed the discussion through their own fecal matter and diluted any useful content with their diarrhea, a positive result as decsribed above was still obtained.
Note to new readers of this thread: Save your time and just read the first page if it is at all useful to you. It will only take a minute and you are welcome to discard it as trash if you find no use for it. Also keep in mind that this forum is sponsored by, and profits from, brokers and other businesses who (most of which) do not want you to succeed in trading. Lastly, if most people rant and rave about the same old, overhyped methods, and most people lose all their money...any lightbulbs lighting up out there?
The most common belief among Forex Factory Traders is that a 1:2 or higher RR is necessary for profitable trading. People who say this often are under the misunderstanding that there is a 50% chance of the market hitting their SL and a 50% chance of it hitting their target. Well a basic understanding of trading and simple mathematics would show that there is a lower chance of price hitting +20 pips than hitting -10. Many traders think if they can come up with a sytem that has a very slight edge then this 1:2 or higher RR will be what makes them money.
The trouble is they need to have a very strong edge to get a 1:2 or higher RR system to be right 50% of the time, purely because it is more likely that price will hit their stop more often than it hits their target.
So what is another approach to the market for those who do not have a huge edge? A 1:1 Risk Reward Ratio.
If we leave off transaction costs for a moment we can say that a 100 pip stop has about as much chance of hitting as a 100 pip Target. I myself pay about 1.2 pips total transaction cost per trade which is 1.2 % of the 100 pip target. Every win will net 98.8 pips and every loss will net -101.2 pips. So our system needs to have a small 2.4% edge to break even. Anything more than that and we are into profit.
So, finding a pattern to enter on that is right 6 times out of 10, will give a total profit of +188 pips. Being right just 51 times in 100 nets +80 pips.
So we are taking about a system/method that has only a slight edge and bingo, we are making money. A pattern that works out just slightly more often than it doesn't is all you need with a 1:1 RR. So why put all that pressure on to have a massive edge big enough to work a 1:2 RR?