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Risk Reward: 1:1, 1:2 or 1:3

  • #81
  • Aug 15, 2018 1:48pm Aug 15, 2018 1:48pm
Interesting thread! :-)

After a lot of trial and error, I pretty much stick to setting a TP at 2R most of the time. This does of course mean that I miss the big winners but I find my equity curve is a lot smoother this way. This means my psychological state is more consistent as I don't have a long string of losers or break-even trades while waiting for the big 3R+ trades. I don't trade very frequently so this is important to me.

This is just my opinion of course but I think it is down to individual psychological make-up. At the end of the day you have to decide which causes the most stress, banking and seeing the move continue versus not banking and seeing the move retrace. Once you make your choice it is just about being consistent. Or knowing when a trade is going to run and run and acting accordingly. But I don't think any of us can do that!
  • #82
  • Aug 15, 2018 4:22pm Aug 15, 2018 4:22pm
My thought on RRR is it is just a mathematical formula to calculate you risks management so to stay ahead and remain profitable no matter what the outcome is. Its not an trading indicator.
Simply put if you have a trading plan with a win-loss accuracy of 50% means the RRR has to be more than 2 to be consistently profitable with a constant trading lot throughout. The higher the WL the lower the RRR and vice versa. Some might use position sizing and other methods to circumvent this formula but the bottom line is you must understand this basic even before attempting to position size or other cross hedging strategy either to maximise profits or to mitigate losses.
The OP claimed that despite his RRR is 2 and 3 and yet he still end up negative overall is becos his WL% is below the required ratio to remain profitable.
My risks management is based entirely on this formula only as my trading plan is greater than 70%. And any trading plan with a WL% more than 50% can be exploited profitably with a better execution entry level with this formula but to remain truly robust the ideal WL > than 60%. which can greatly instil more confidence to ensure discipline to follow the trade thru no matter what and how the PA becos you will stay ahead in profit no matter the outcome.

GS
  • #83
  • Aug 15, 2018 7:44pm Aug 15, 2018 7:44pm
When you talk about win-loss accuracy % you must associate it with R:R. For example, a 50% win-loss accuracy doesn't exist. Only a 50% win-loss accuracy at R:R of 1:1/2:1/3:1/... exists. Generally the higher the win-loss accuracy, the lower the R:R.
  • #84
  • Aug 15, 2018 8:05pm Aug 15, 2018 8:05pm
Quoting pooh123
When you talk about win-loss accuracy % you must associate it with R:R. For example, a 50% win-loss accuracy doesn't exist. Only a 50% win-loss accuracy at R:R of 1:1/2:1/3:1/... exists. Generally the higher the win-loss accuracy, the lower the R:R.
50% WL accuracy in the context of each individual trading plan and if you don't have a trading plan I would assume either you don't plan to trade or you don't have one.
  • #85
  • Aug 17, 2018 6:39pm Aug 17, 2018 6:39pm
Quoting tradesimply
Interesting thread! :-) After a lot of trial and error, I pretty much stick to setting a TP at 2R most of the time. This does of course mean that I miss the big winners but I find my equity curve is a lot smoother this way. This means my psychological state is more consistent as I don't have a long string of losers or break-even trades while waiting for the big 3R+ trades. I don't trade very frequently so this is important to me. This is just my opinion of course but I think it is down to individual psychological make-up. At the end of the day you...
You put it beautifully! I am with you on the psychological thing; I used to lose my spirit after seeing multiple orders get so close to TP, not hit it and stop! It's the most frustrating thing that can happen to a trader. The worse is you can't convince yourself by "come on boy, at least you had predicted a good move, you were just unlucky".

Then I studied all there is out there about R:R. Here is my findings: People are wrong! any ration without the consistence plan takes you nowhere. On the contrary, one can win a good balance even with his SL three times bigger than his TPs

I am pasting one of my comments on EURUSD in this forum.

Instead of placing one or two big lot orders I divide it by 5 or even 10; this way I always take something; I don't have to worry about my target not getting hit. The worst scenario of having all 5 orders stop never happens more than 1 out of 5 trades and is compensated by the next two trades. These next trades don't have to give me everything. Even with the bad luck I need only the first two targets (out of five) to be met which covers the loss I had so far. The coming trades bring the balance to the good side. Now! The best scenario of having all 5 targets hit also happens no more than 1 out of 5 trades, BUT since my SL is always tight this all-hit order has the potential profit to cover 2 or even 3 all-loss orders (the old story of R-R):

1st order TP under 23.6 fibo (a very small tp gives me at least 1/3 of the points I could lose under the worst scenario of having all 5 orders fail).
2nd order TP 23.6 fibo (again, no ambitious TP; just to guarantee some back up points)
3rd order TP 38.2 trailing stop (it makes no sense to let the chart take all the profit I had so far)
4th order TP 50.0 trailing stop (pure profit now), the hedge starts here were there is possibility of retracement.
5th order TP 61.8 trailing stop, the second hedge order - have you too noticed that hedge and martingale are same in essence?
  • #86
  • Aug 18, 2018 3:15am Aug 18, 2018 3:15am
Quoting ghaaran
{quote} You put it beautifully! I am with you on the psychological thing; I used to lose my spirit after seeing multiple orders get so close to TP, not hit it and stop! It's the most frustrating thing that can happen to a trader. The worse is you can't convince yourself by "come on boy, at least you had predicted a good move, you were just unlucky". Then I studied all there is out there about R:R. Here is my findings: People are wrong! any ration without the consistence plan takes you nowhere. On the contrary, one can win a good balance even with...
Thanks ghaaran :-)

Yes, staggered targets is a great way to go. I know some traders who use staggered entries but only one exit. I prefer staggered entries and staggered exits. That way, the "unlucky" losses are smoothed out.

Another thing I've noticed is that for every stop hit by 1 pip and then reverse, I've had a target hit by 1 pip and reverse! In other words, we tend to focus on the "unlucky" trades and forget that there are probably the same number of "lucky" trades. They cancel each other out and make no difference in the long run (apart from on our psychology!)
  • #87
  • Jun 18, 2019 6:50am Jun 18, 2019 6:50am
A question regarding Risk-Reward Ratio.
Let's say that I have EAs that are managing the positions for me, and I want to know which of them is having the best Risk-Reward Ratio by using this formula:
( Abs (SL-entry) / Abs (Tp-entry) ) AVG_Total_Trades.

The problem is that if the EA is moving the STOP LOSS to break even or even above the entry price, or I the EA is using a Trailing stop method so I'll never get the real Risk-Reward Ratio.

How do you suggest to calculate the history of closed positions? or there is no way to calculate it and I have to know the SL/TP inputs in advance?

Thanks
  • #88
  • Jun 18, 2019 9:19am Jun 18, 2019 9:19am
Fixed R:R are one of those myths that needs to DIE !!

you never know for sure how much the market its going to move in your favor.. period; the only thing you can aim its when you place a trade do it with a very high % of probability that the price will move in 1 direction

Obviusly in the long run, your profits should be bigger than your losses so you end positive and you could actually be able to withdrawn money and enjoy it (thats not the whole point of trading in the first place??)

manage your trade once its placed, let the market move and protect the profits accordingly along the way (BE, Traling, partial close, manual close, etc) thats all you need to do once the trade its out in the wild

and for god sake, ditch that myth of fixed R:R out of your life, thats one of the most dumb/noob thing a "trader" can do =)
  • #89
  • Jun 18, 2019 9:26am Jun 18, 2019 9:26am
Risk reward is like that carrot dangling in front of a donkey that it will never taste. Nobody can ever predict where price will go so you are essentially building a mechanism whereby you assume its an edge, when in fact is probably one of the reasons for losing.

Instead of assuming you will gain X from any given trade you should rather use a market feedback approach where the market tells you when it is time to get out.

Don't waste your time with risk reward it is smoke and mirrors.
  • #90
  • Jun 18, 2019 9:58am Jun 18, 2019 9:58am
have you tried using market structure for better placement of risk/reward. ?
Professional Funds Trader
  • #91
  • Edited 5:37pm Sep 23, 2019 9:39am | Edited 5:37pm

I've created a new thread to further expand this discussion. Follow this link...


https://www.forexfactory.com/showthread.php?t=950059

  • #92
  • Mar 10, 2020 2:48am Mar 10, 2020 2:48am
Hi Guys

Im new here so forgive me if I posted in the wrong place. I am looking for a reliable broker (UK deposit) that I can trade USD/ZAR exotic pair at 1:3 leverage. Most other brorkers ive come across insist on a higher leverage which isnt my game.

Please advise.

Thanks in advance!
  • #93
  • Mar 11, 2020 2:16am Mar 11, 2020 2:16am
Accuracy is more important. R/R is less important than accuracy. S/L's and high leverage reduce accuracy.
Count Of Antwerp
  • #94
  • Mar 11, 2020 4:50am Mar 11, 2020 4:50am
Quoting countaccrue
Accuracy is more important. R/R is less important than accuracy. S/L's and high leverage reduce accuracy.
That's right! But don't you use leverage at all?
  • #95
  • Mar 11, 2020 6:57am Mar 11, 2020 6:57am
Quoting Tim01
{quote} That's right! But don't you use leverage at all?
I love leverage but 100X leverage is unadvisable.
Count Of Antwerp
  • #96
  • Sep 24, 2020 4:37pm Sep 24, 2020 4:37pm
Quoting FXAssassin
Whenever I read these posts, it seems to me that there is a split with a bunch of people cheering on a 1:1 ratio and another holding out for the 1:3 ratio. What I've noticed, at least on the various systems I've been trying out, is that price will often hit a 1:2 ratio but it will rarely hit a 1:3 ratio. At least from a day trading perspective. So why not go for 1:2? Some would counter that, using this logic, a 1:1 ratio would be even better, but the fact is that in such situations you're chewing through a lot of broker commission. Your cutting...
My thoughts are; why not go for 1 to 1.1, with the 0.1 extra to cover spread and commissions?

Surely, any method that delivers winners will perform at a 1 to 1.1 Risk to Reward.

Obviously, the strike must be higher than entering at random, long / short / 50-50 chance.

From there, it a matter of increasing the lot size as account grows, thereby increasing profitably; your thoughts?



There are trade management EA's that automatically calculate the proper lot size according to user risk, stop loss and take profit settings, e.g. 1% to 1.1% at 100 pips.

It takes a lot for me to IGNORE you, but you can try.
  • #97
  • Sep 25, 2020 7:09am Sep 25, 2020 7:09am
Anything bigger than 1:1 makes you remain calm and cool if you're not fckn high experienced.
  • #98
  • Last Post: Sep 27, 2020 5:56pm Sep 27, 2020 5:56pm
R:R is everything in trading. Everyone's trading has a R:R whether they know it or not. If you're not profitable your R:R will reveal the truth of your trading. Just do the math. It's not rocket science but is the difference between being profitable and not. Using R:R will reveal the truth about your trading strategy.
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