What Is a 3:1 Reward to Risk Ratio? | Forex Factory

Options

Go to
Permalinks
Print Thread

Similar Threads

Rationale behind "Risk Per Trade" and "Risk/Reward Ratio"? 8 replies

Regarding risk/reward ratio 10 replies

Is a high risk reward ratio overrated? 12 replies

Good reward/risk ratio experiment 20 replies

Risk Reward Ratio and Account Risk 30 replies

Attachments: What Is a 3:1 Reward to Risk Ratio?
Exit Attachments

What Is a 3:1 Reward to Risk Ratio?

  • #1
  • First Post: Sep 9, 2020 11:52pm Sep 9, 2020 11:52pm
The subject of 3:1 Reward to Risk Ratio came up in another thread and I decided to look into it.

Personally, setting an arbitrary number based on when you decided to enter a trade is a weird notion to me. When you decide to enter, you are not only making a decision to enter, you are also deciding the time frame of your entry (With it's own issues like one TF says buy and another says sell), as well as the exit directions and the extent of which on either side. It is a stock market rule that seems to have found it's way to FX trading. It goes with all that speculating and watching the price to go up or down based on your astute research and savviness of tell tale signs that only you know what they are. Similar enough I guess, so why not? And I mean it; WHY NOT?

According to this article, you have to be right 80% of the time on average. http://www.thetransparenttrader.com/...-ratio-trades/

So, you shall not follow the 3:1 RR rule unless you are that damn good.

Anyone has any comments?
Anyone does this strictly and pulls it off? If yes, you have the 80% winrate that it takes?
  • #2
  • Sep 10, 2020 12:11am Sep 10, 2020 12:11am
I've got an analogy To go with it.

Imagine you have a crime boss who doesn't speak. You go to visit him and he sometimes smiles, sometimes frowns and other times he may half frown half smile and goes back and forth between his moods. He reaches and touches one earlobe or he clears his throat. He walks towards the window and then stops and goes for a door. In between all that, he picks his nose and sometimes may roll on the carpet and bark. There is a lot more that he does.

So you watch him while you are visiting and after 30 minutes or so, you can tell exactly where the suitcase containing the proceeds of the crime is hidden. He spoke to you in his fijity language and gave you enough information and you are so good at reading him that you nail it 8 times out of 10. Sometimes 10 out of 10 with the odd misses here and there.

But that is just finding the location of the money bag. You also, can tell when the cops are coming. A few minutes minutes at the bag and if the cops come, you dive through the window with whatever injury you decided to give yourself. 1%? 5% stop loss? How much do you love yourself? Geckos I am sure love themselves. That is why certain kinds drop their tail and run away when in danger. It seems to work but what happens moments later when the Gecko encounters another danger? In FX, as a Gecko, you are entitled to 3 tails if you are 80% of the time right.

so, you are at the bag of money and you could take it all. You could fill up your pockets as much as you want while the cop isn't showing up. But no, you are too smart. You know only 3 stacks of the bills in the bag and that is all you deserve. You take your honorable 3 stacks and walk away like a cool cat.


It's a lot of being smart. A good job to get into. Read the boss, minimize getting hurt and only skim off the top because otherwise you will fail. I don't know if I can be that good. Certainly some of you are.

I'm only looking for some info here. LOL
  • #3
  • Sep 10, 2020 12:20am Sep 10, 2020 12:20am
Quoting OutThere
Personally, setting an arbitrary number based on when you decided to enter a trade is a weird notion to me.

Hi OT,

Yes 3:1 would seem like a stock market style of R:R by getting onto a longish trend.


The 3:1 part is not arbitrary of course, but only where the trader sees the “profit area” to be.


And by then back-fitting the 3:1 might be how they use it I do not know
(because I am an in & out scalper also with hedging of the same pair at times so I do not use the R:R style of trade closure for either TP or SL).

So if a traders' perceived TP is 60 pips away from current price - at a logical area for price to either stall/exhaust in their assessment - then the invoking of a fixed 3:1 would mean a hard 20 pip SL.

But if the traders technical analysis “stop loss” area is not around that 20 pip distance away then it would only create a higher risk of stop out which may of course not be any stall/exhaust zone at all, just the fixed 3:1

The fixed 3:1, based ONLY on the profit zone target, could leave the trade at risk of being cleaned out in the rotations.


I have seen some excellent FX traders using 2:1 R:R

And nailing it over & over, day after day mostly, while also closing their trades at Break Even or slightly better if price reversed on them (so not even invoking the x:1 SL part of the R:R function).

Those who use this 3:1 R:R style would be better equipped to discuss this than me of course.
  • #4
  • Edited 1:07am Sep 10, 2020 12:34am | Edited 1:07am
Quoting TimeTells
{quote} Hi OT, Yes 3:1 would seem like a stock market style of R:R by getting onto a longish trend. The 3:1 part is not arbitrary of course, but only where the trader sees the “profit area” to be. And by then back-fitting the 3:1 might be how they use it I do not know (because I am an in & out scalper also with hedging of the same pair at times so I do not use the R:R style of trade closure for either TP or SL). So if a traders' perceived TP is 60 pips away from current price - at a logical area for price to either stall/exhaust in their assessment...
Hi TT

Basically we have 3 points in view. Entry. Exit with profit and Exit with loss.

I see that one can enter based on the perceived 'Exit with profit' or other ways of the usage of the same 3 factors but the end of the day, all those points are based on personal decisions that may widely be different from trader to trader.

This is basically a discretionary way of trading with a mechanical distance placed around the entry. Yes you can work the 3 points in different orders but the entry point is what gets you in. So if discretionary trading is 80% correct, the rest is nothing worth putting too much thought into cause the 3:1 RR takes care of that.

The same guy who wrote the first article on 3:1 RR also wrote this about 2:1 RR: Here’s why trading a 2:1 reward to risk ratio is a terrible idea https://www.thetransparenttrader.com/blog-articles/heres-why-trading-a-2:1-reward-to-risk-ratio-is-a-terrible-idea/

So you need to be really good at choosing an excellent entry if you want the 2:1 to work. If that good consistently, Apparently a time based exit beats any ratio based exit.
  • #5
  • Sep 10, 2020 2:39am Sep 10, 2020 2:39am
Quoting OutThere
I've got an analogy To go with it. Imagine you have a crime boss who doesn't speak. You go to visit him and he sometimes smiles, sometimes frowns and other times he may half frown half smile and goes back and forth between his moods. He reaches and touches one earlobe or he clears his throat. He walks towards the window and then stops and goes for a door. In between all that, he picks his nose and sometimes may roll on the carpet and bark. There is a lot more that he does. So you watch him while you are visiting and after 30 minutes or so, you can...
Imagine you are a bread delivery man. You stop your van down a quiet alley. Then you do this. Remove 1slice from each loaf, well distributed for say a quarter of the trays.

Repack those slices into new loafs, sell them to selected outlets at a discount.

The bills in the money bag, I bet you know how to be the silent gecko now.
Know what you trade
  • #6
  • Sep 10, 2020 4:46am Sep 10, 2020 4:46am
What about risking say 40 pips to make 20, wonder what the math is on that.
Get the Lag out
  • #7
  • Sep 10, 2020 5:34am Sep 10, 2020 5:34am
Quoting ZeroLag
What about risking say 40 pips to make 20, wonder what the math is on that.
It's absolutely okay while you have high winrate.
  • #8
  • Sep 10, 2020 6:34am Sep 10, 2020 6:34am
1:3 RR is just one of the forex fairy tales and myths for newbies. To let them a) look at the trading the way it is gambling and b) to let them lose fast. There can't be any positive math expectation in such an approach.
Observer effect
  • #9
  • Sep 10, 2020 6:44am Sep 10, 2020 6:44am
Quoting ryuryu
1:3 RR is just one of the forex fairy tales and myths for newbies. To let them a) look at the trading the way it is gambling and b) to let them lose fast. There can't be any positive math expectation in such an approach.
I wonder if people realise how difficult to trade a 1:3RR with 50% win rate at 2 trades a day as example. Tell any pro gambler this can be done in forex markets they will ditch the casinos. Goodbye poker.
Know what you trade
  • #10
  • Sep 10, 2020 7:24am Sep 10, 2020 7:24am
Quoting ZeroLag
What about risking say 40 pips to make 20, wonder what the math is on that.
//-----

hey z.... the math would be risk/reward..... 40/20, or 2 to 1, or 2:1..... as i'm sure you know.....

however, your manner of spelling it all out is far better than the common practice of saying 2:1......

and fwiw, entry's might be the ultimate quest......h
to trade and code, keep both simple... no call to impress....h
  • #11
  • Edited 8:32am Sep 10, 2020 8:05am | Edited 8:32am
Quoting BWilliam
{quote} I wonder if people realise how difficult to trade a 1:3RR with 50% win rate at 2 trades a day as example. Tell any pro gambler this can be done in forex markets they will ditch the casinos. Goodbye poker.
Yep, also if they realise that there is no answer for the question "Who said that price must go +3, not +2.98 then -2 +2.99 then -2 +2,73 then -2 and so on and so on. How this can be even possible if assume that we are not in Hogwarts and there is no magic wand on the table?
Observer effect
  • #12
  • Sep 10, 2020 8:24am Sep 10, 2020 8:24am
Quoting ryuryu
{quote} Yep, also if they realise that there is no answer for the question "Who said that price must go +3, not +2.98 then -2 +2.99 then -2 +2,73 then -2 and so on and so on. How this can be even possible if assume that we are not in Hogwarts and there is no magic want on the table?
What is the best approach for you? Move the stop loss to gain? I'm curious to know how you think, I agree with you
  • #13
  • Edited 8:44am Sep 10, 2020 8:32am | Edited 8:44am
I have tested tons of strategies and I can admit that trading with stop loss (same with hard TP and SL aka RR) = 100% guarantee to ruin your account. I don't know how to use them in real life. I'm sure that stop losses is just a forex myth for newbies, same like RR, "cut your losses fast" and manual trading. So I don't use SL for the first entry. If it not reached and price reverse then I use hedges. Also big players need to have liquidity and guarantees. Stops are guarantees of liquidity. They are good only for big players and for brokers.

But for every entry there are exit calculated also. I think the problem here and in every strategy that we are using math to find entries. But we are using luck (RR) for exit.

Just imagine:
Calc for entry: MA50 abowe MA200, not crossed, RSI >80, Stoch oversold on 28 timeframes, moon is full, not a winter, no Monday, no news, higher than daily open, previous 100 deals was ok, TDI cross bollinger upside down, speed is 100 bars, swap is negative, candle is red, candle body is not bigger than not smaller than, shadow is <300%, look like a hammer .. .. .. . . .
Calc for exit: +300p, sl -100p
Observer effect
  • #14
  • Sep 10, 2020 1:02pm Sep 10, 2020 1:02pm
Quoting BWilliam
{quote} Imagine you are a bread delivery man. You stop your van down a quiet alley. Then you do this. Remove 1slice from each loaf, well distributed for say a quarter of the trays. Repack those slices into new loafs, sell them to selected outlets at a discount. The bills in the money bag, I bet you know how to be the silent gecko now.
Speaking from experience? Lol

So you mean to skim from the top just enough to make a dime or two and everyone will be happy and repeat that the next day?

When I was first reading it, I thought you pulling into a quiet alley in a van had some other plans.
  • #15
  • Sep 10, 2020 1:10pm Sep 10, 2020 1:10pm
Right!
How can you say that you are going to have a 3:1 reward to risk ratio?
this is the right question.
you can’t decide to have a 3:1 risk to reward ratio. It’ a conseguence, not a choice.
The past is already gone, the future hasn't arrived yet
  • #16
  • Sep 10, 2020 2:14pm Sep 10, 2020 2:14pm
Don't you know that it works this way:
Some random guy: - Hey, Market! I want to win using 1:3 RR! Ok?
Market: - Sure, Random Guy from FF. Deal! Now the price will always move at least 3 times higher/lower and will never touch you SL.
Observer effect
  • #17
  • Sep 10, 2020 11:37pm Sep 10, 2020 11:37pm
I think the traders that believe in 3:1 or even 2:1 have a little trick up their sleeves.

Everyone assumes that they set a for example 100 pip SL and a 300 pip TP and forget about it.

How about BE? How about trailing stop?

If BE is hit, it's not so bad as SL being hit. So in effect minus minor possible charges, it's like the trade never happened.

If the trade enters the realms of trailing SL, then depending how the start and steps are configured, there may be even a chance to reach the 300 TP especially if there is a sudden long none-stopping candle. It happens quite a bit nowadays. This could be the jackpot that makes all the SL's worth taking.

So, in reality, there is a chance of exactly hitting either 1 or 3 and if you think the distance from 0 to 3 is long, there is the trailing stop that bails you out.

Maybe with a bit of creativity, a pyramiding scheme can be inserted in there too,
Damn, that's an EA right there.
  • #18
  • Sep 11, 2020 3:42am Sep 11, 2020 3:42am
I think the 3R type trades are easier in trending markets. Entering after a pullback you can keep stops relatively small.
Attached Image (click to enlarge)
Click to Enlarge Name: 3R.jpg Size: 99 KB
  • #19
  • Sep 11, 2020 4:37am Sep 11, 2020 4:37am
Quoting BubaYaga
I think the 3R type trades are easier in trending markets. Entering after a pullback you can keep stops relatively small. {image}
Yes, we just have a different opinion about what RR is.
In my opinion RR is how much you risk to gain something. For this I said that RR is a conseguence, a mean if you want , but not a choice.
The past is already gone, the future hasn't arrived yet
  • #20
  • Sep 11, 2020 7:30am Sep 11, 2020 7:30am
Quoting ryuryu
I have tested tons of strategies and I can admit that trading with stop loss (same with hard TP and SL aka RR) = 100% guarantee to ruin your account. I don't know how to use them in real life. I'm sure that stop losses is just a forex myth for newbies, same like RR, "cut your losses fast" and manual trading. So I don't use SL for the first entry. If it not reached and price reverse then I use hedges. Also big players need to have liquidity and guarantees. Stops are guarantees of liquidity. They are good only for big players and for brokers. But...
Stop loss for me is an emergency stop. I need it in case of sudden movements against my position or problem with the line
The past is already gone, the future hasn't arrived yet
0 traders viewing now