So I created another thread here on Forex Factory talking about how the concept of a 1:1 Risk/Reward ratio is unfairly scrutinized by the trading community in general and how most people don't understand the power of hitting 55-60% of trades with a 1:1 ratio. About a month ago I stumbled upon a renko video on youtube where a backtest was performed to see if a profitable system could be used by entering a trade after 3 consecutive bricks and exiting on the first reversal brick. I'll leave a link to the video below and also a screenshot of his results. To quickly summarize, the strategy he was using turned out to be around a break even strategy once commission and slippage gets factored in. I then took the numbers from his backtest and used the same strategy for entering but for exiting, I used a 1:1 ratio. Below were my findings based on the numbers he found in his backtest: (I posted this in the youtube comments section of the video but received no feedback or follow up so am also posting it here)
Renko 3 Brick Trend Strategy Test - YouTube
Assume the take profit level for each trade is 20 pips, or two bricks. This gives the system a reward to risk ratio of 1:1. This would also mean that every "break even" trade now becomes a profit because in order for the trade to be break even in the original system, the selected currency pair would of had to produce 2 bricks in the profit before having a reversal brick cancel out. Below is my math for the new 1:1 risk/reward system based on the data in this video:
Total Trades - 1885
Wins - 1222 (735+487)
Losses - 663
Win% - 64.8%
Now to find how many total bricks of profit we have:
1222 (total wins) * 2 = 2444. 2444 - 796 (bricks lost in video above) = 1648 bricks of total profit. Since every brick is worth 10 pips, we have a total pip profit before commissions/fees of 16,480. To be on the conservative side for commissions, I will use a 2 pip cost associated with every trade.
Cost for commission/fees - 1885 (total trades) * 2 pip cost = 3770 total pip cost Total pips gained from backtest - (16480 - 3770) = 12,170 total pips gained. Assuming 1% of account balance risked per trade, the net return over the 6 month period would be 635% Every 20 pips gained represents a 1% gain in the account, so we divide 12,170 (total pips gained) by 20 (1% gain) to get the 635% gain.
I'd love to hear any input about this and see if anyone else has any experience with this. I personally trade using renko/range bars but enter a trade based on pullbacks and don't something quite as simple as "enter after a third brick". All questions and comments welcomed!
Renko 3 Brick Trend Strategy Test - YouTube
Assume the take profit level for each trade is 20 pips, or two bricks. This gives the system a reward to risk ratio of 1:1. This would also mean that every "break even" trade now becomes a profit because in order for the trade to be break even in the original system, the selected currency pair would of had to produce 2 bricks in the profit before having a reversal brick cancel out. Below is my math for the new 1:1 risk/reward system based on the data in this video:
Total Trades - 1885
Wins - 1222 (735+487)
Losses - 663
Win% - 64.8%
Now to find how many total bricks of profit we have:
1222 (total wins) * 2 = 2444. 2444 - 796 (bricks lost in video above) = 1648 bricks of total profit. Since every brick is worth 10 pips, we have a total pip profit before commissions/fees of 16,480. To be on the conservative side for commissions, I will use a 2 pip cost associated with every trade.
Cost for commission/fees - 1885 (total trades) * 2 pip cost = 3770 total pip cost Total pips gained from backtest - (16480 - 3770) = 12,170 total pips gained. Assuming 1% of account balance risked per trade, the net return over the 6 month period would be 635% Every 20 pips gained represents a 1% gain in the account, so we divide 12,170 (total pips gained) by 20 (1% gain) to get the 635% gain.
I'd love to hear any input about this and see if anyone else has any experience with this. I personally trade using renko/range bars but enter a trade based on pullbacks and don't something quite as simple as "enter after a third brick". All questions and comments welcomed!