Risk/Reward for Modest Gains

Hello FF.

I've just started trading live this week. I've been backtesting for over a month now, and I formulated a strategy that works for my personal style. Currently I'm focussing only on the EUR/USD pairing, and set my trades to last up to a week at a time. I've got what I think is a pretty solid MM scheme, with a 2:1 risk reward ratio. It's a conservative strategy, and I expect only modest profits... but thats ok with me. I'm trying to figure out the best risk reward ratio to use when making daily trades (i.e trades that will not carry for more that 24 hours.)

Let me start by saying that I do not use indicators. I use a spreadsheet with open/close, and high/low prices. A few formulas later and I know what direction I want to trade. I'm keeping it simple. I don't have to be right every time. With a proper MM strategy, I should be able to scratch out a profit.

My question though, is what risk reward ratio should be used for daily trades? If I'm looking for a modest, 10 to 15 pips per day, what do I do? A 5 pip S/L seems way too tight. I tested with a 1:1 ratio, but the results didn't look good. I even tested with a 30pip S/L and 15pip TP, but as expected, the results stunk up the joint.

Is there anyone here that uses a 10 to 15 pip TP on a daily basis, and if so what is your risk reward ratio? If you are aiming at 15pip TP, where do you put your S/L?

Thanks,
Tryad

I find it's easier to set a weekly total of pips gained as a goal. If you are trading daily charts and wish to gain 15 pips per day or 75 per week, I think it would make more sense to try and accomplish that in as few trades as possible.

what is your method for trading?

I use a 200 EMA and a 72 EMA as moving support and resistance. I base my trades off those. When price approaches one of the EMAs I place entry-stop orders 20 pips above and below the EMA price. Oh, and I trade off hourly charts.

My risk:reward ratio is 1:1. Sometimes it's 1:1.5. That means if I want to get 20 pips I bet 20 pips on that. And sometimes it's a 30 pips for 20 pips bet.

Taking into account that most of the time my trading system doesn't let me down (well except for today. Had two consecutive losses ), for EUR/USD SL is usually 20 pips.

Update: ooops, I take back what I've said before about losses ^_^

when i see a trade i just put my stop behind nearest or second nearest support/resistance, and if the risk/reward ratio dont look good with that method i dont take that trade. 1:1 is the worst ratio i trade. but i suppose thats kinda hard to do if your asking for 15 pips

I've seen some people saying 3:1 ratio is acceptable
I wonder if that promises anything good

I'm hesitant to try a trading strategy with a risk reward of over 1.5:1. I believe that the further price moves from your entry, the more difficult it is to predict future behavior of price. Think about it, how many of your trades would have been profitable if they were closed after you've been up 10, 20 pips? I have learned that I am more comfortable consistently hitting singles, than swinging for the big home-run.

Good point, and this was exactly what I was hoping for. I just can't seem to make it work though.

On a weekly basis, it seems if I set my S/L at 100 pips, and my TP at 200... I can scratch out a profit over time. Of course, having a good system to let me know if I should go long or short helps tremendously.

On a daily basis, I would love to be able to chip away at 10 pip gains, but I can't make it work. If I use a 1:1 ratio, it's not worth it. I lose as often as I win, so the spread ends up killing me. If I use a 2:1, the S/L is too tight and gets hit more often than not. If I go the other way, and use 30 pips for a S/L and 15 pips for a Take Profit, then I hit a few losing days in a row and can't bounce back.

All signs are pointing towards me just staying with a weekly trade and opening it up to other pairings, but I would love to enter trades on a daily basis.... if only for the excitement.