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The Main Rule of FOREX

  • #1
  • First Post: Edited Dec 14, 2007 9:23am Dec 13, 2007 5:46am | Edited Dec 14, 2007 9:23am
I am not quite sure of too loud name of the article. I want you to pay attention to it.
Better Call it Condition of Profitable Trading

RR < w/(1-w)

where w = Average win ratio
RR — risk/reward

My formula says how to calculate win ratio, if you have RR. And vice versa
  • #2
  • Dec 13, 2007 7:23am Dec 13, 2007 7:23am
if w is the win %, then 1-w is the lose %

so (w / 1-w) is the win/loss ratio, same as (#wins / #losses).

then your formula says your win/loss ratio must be greater than your R:R.

So, your formula, put simply, says: "if you have 3 wins for 1 loss, your average win size must be greater than 1/3 of your average loss"

Which says "3 average wins must total more than 1 average loss in order to be profitable".

Which says, "you must make more than you lose, to be profitable."
  • #3
  • Dec 13, 2007 7:32am Dec 13, 2007 7:32am
Quoting Prof
Condition of Profitable Trading
w/(1-w) > RR

where w = Average win ratio
RR — risk/reward

what do http://www.forexfactory.com/images/misc/1kt.gif think?
I am not 1KT member yet, but...
Dude, you give us incomplete formula.
RR is here Reward Ratio right?

How do you calculate the risk?

Give us more information, before we can give our opinion.
Trainee at UBS Investment Banking
  • #4
  • Edited 10:05am Dec 13, 2007 7:41am | Edited 10:05am
Quoting blueruby
if w is the win %, then 1-w is the lose %

so (w / 1-w) is the win/loss ratio, same as (#wins / #losses).

then your formula says your win/loss ratio must be greater than your R:R.

So, your formula, put simply, says: "if you have 3 wins for 1 loss, your average win size must be greater than 1/3 of your average loss"

Which says "3 average wins must total more than 1 average loss in order to be profitable".

Which says, "you must make more than you lose, to be profitable."
Yes, I wrote
— this is rather simple rule
http://www.forexfactory.com/showpost...8&#post1756138

But no one use this simple rule at forum. And some traders feels difficulty without the rule. Just have a look at the thread
http://www.forexfactory.com/showthread.php?t=59355

My formula says how to calculate win ratio, if you have RR. And vice versa
  • #5
  • Dec 13, 2007 7:52am Dec 13, 2007 7:52am
Quoting Prof
Condition of Profitable Trading
w/(1-w) > RR

where w = Average win ratio
RR — risk/reward

what do http://www.forexfactory.com/images/misc/1kt.gif think?
Maybe I am not looking at this right, but don't you have this bold red part backwards?

If I had a risk of 20 and a reward of 90, that would mean my ratio is 0.2222, which I think is not correct. shouldn't it be Reward / Risk?

So if I had a reward of 90 and a risk of 20, my ratio would be 4.5 or in ratio form 4.5:1
  • #6
  • Edited 8:22am Dec 13, 2007 8:08am | Edited 8:22am
that means RR = win : loss ratio (SL & TP) where the risk = loss,
and average winning = % chance the trade ends in profit.....

yes i agree, and good luck,
ps: average winning is not guaranteed in the future event, future= risk
so up till now, i never really know the risk
i think blueruby say it best on prof behalf
  • #7
  • Edited 10:24am Dec 13, 2007 8:13am | Edited 10:24am
Quoting smjones
Maybe I am not looking at this right, but don't you have this bold red part backwards?

If I had a risk of 20 and a reward of 90, that would mean my ratio is 0.2222, which I think is not correct. shouldn't it be Reward / Risk?

So if I had a reward of 90 and a risk of 20, my ratio would be 4.5 or in ratio form 4.5:1
risk/reward was mentioned here

not Reward/Risk just Risk/Reward

w(1-w) > 2/9
9w > 2-2w
11w > 2
w > 2/11
w > 0.182
  • #8
  • Edited 10:25am Dec 13, 2007 8:39am | Edited 10:25am
Quoting Gwan
that means RR = win : loss ratio (SL & TP) where the risk = loss,
and average winning = % chance the trade ends in profit.....

if it is about math then yes i agree, and good luck,
ps: average winning is not guaranteed in the future event, future= risk
some month you have N profits and M losses
average profit is P dollars
average loss is D dollars

The formula is really simple:
RR = D/P
w = Average win ratio = N/(N+M) (wich refer to probability)

w/(1-w) > RR
(N/(N+M) ) /( M/(N+M)) > D/P
N/M > D/P
P*N > D*M
Profit > Loss

I believe the formula is very useful. No one before here can calculate minimum of win ratio for the current RR. No one before here can calculate maximum RR for current win ratio.

Maybe someone can calculate. But the rest have no simple way to do that. Nothing is wrong, isn't it?
  • #9
  • Edited 1:37pm Dec 13, 2007 1:11pm | Edited 1:37pm
Maybe I write something in impolite tone...

Not knowing the language I find it difficult to find proper words...

But I am quite sure the inequation is very useful. And 1kt Members cannot understand all the matter.

I shall try to show the advantages of the inequation to all the traders.

 

  1. First form of the the inequation is for determining SL & TP. Traders, who are using Sytems for tradig need it badly.
    RR < w/(1-w) (1)
    If one knows Average_win_ratio he can calculate the maximum of SL / TP = RR

    From the inequation traders can find out numerical value of fraction SL / TP.
    They can choose explicit value of SL & TP later.

    :::

  2. There are many systems and trading manners wich use predefined value of Stop Loss and Take Profit. The 2nd form is for calculation of minimal value of win ratio.
    w > RR / (1+RR) (2)

here
w = Average win ratio
RR — risk/reward

I am almost sure that the inequation has been shown in some books, lectures or so. It is too simle. But yet it is still very useful

  • #10
  • Dec 13, 2007 8:06pm Dec 13, 2007 8:06pm
Quoting Prof
There are many systems and trading manners wich use predefined value of Stop Loss and Take Profit. The 2nd form is for calculation of minimal value of win ratio.
w > RR / (1+RR) (2)
here
w = Average win ratio
RR — risk/reward

Hello Prof,

You are right, this equation is very useful and many new traders are not aware of the relationship between the win rate and the RR. I actually refer to this as "the fundamental equation of trading," but I usually think of it this way (equivalent to your way):

W = win rate
G = average Gain (or predefined TP as you pointed out)
L = average Loss (or predefined SL as you pointed out)

In order to have a positive expectancy:

W > L / (G + L)

For example if my strategy is to set my stop at 20 pips and my TP at 30 pips, my win rate would have to be 20 / (20 + 30) = 40%

You can also think of this value L / (G + L) as the "typical entry point" of a trader, meaning the percentage distance measured from the SL to the TP that they typically enter a trade. For example if I look at someone's last 100 trades and I see that they have an average loss of 40 pips (on the losers) and an average gain of 160 pips (on the wins) then this value is:

40 / (40 + 160) = 20%

This means this trader's entry point is generally 20% of the way from their SL to their TP. In other words, this trader's stops are fairly tight and they let winners run. Since their "entry point" is at 20%, their win rate must be at least 20% in order to be profitable.

This shows the tradeoff between win rate and RR too. If you have small stops and large targets, more trades will get stopped out and your win rate will go down. However, the REQUIRED win rate goes down as well. Vice versa for the trader who sets tight TPs and wide stops. Their win rate may be high, but their REQUIRED win rate L / (L + G) is also high.
  • #11
  • Edited 2:18pm Dec 14, 2007 8:36am | Edited 2:18pm
Quoting capitalist88
Hello Prof,

You are right, this equation is very useful and many new traders are not aware of the relationship between the win rate and the RR. I actually refer to this as "the fundamental equation of trading," but I usually think of it this way (equivalent to your way):

W = win rate
G = average Gain (or predefined TP as you pointed out)
L = average Loss (or predefined SL as you pointed out)

In order to have a positive expectancy:

W > L / (G + L) ... ... ...
Hello capitalist88!

Maybe the rule is something like the fundamental equation of trading. But, e.g., options have many other rules... I would name it smthng like
Main Rule of FOREX

And it is not joke. They cannot find out more significant rule for forex.

When I have read your extra name "Math Geek", I thought you want to bit the head off a live chicken or somthing like that.

And when I've read "a positive expectancy: W > L / (G + L)" I thought that it is your chicken.
w corresponds to probability, not to expectancy! w is always positive, not occasionally

And I do not like name 'equation'. Inequation is not 'equation' at all
a > b <---> a=b
multiply -1
-a < -b <---> -a=-b
1/
1/a < 1/b <---> 1/a=1/b
That is nearly arithmetic. Trader need arithmetic badly. And trader can do without arithmetic joke.

The rest of your note turn up quite serious. "more trades will get stopped out and your win rate will go down"

Some traders will get stopped out but my win rate will not go down. And what is more many traders, who watching market, makes pyramid scheme in 1 transaction (maybe later about it). I began to write about it, no one was interested.

Traders must trade properly. The formula helps those traders who want to trade correctly

capitalist88! A lot of your remarks are true, reliable, and correct
  • #12
  • Last Post: Edited 3:36am Dec 17, 2007 3:07am | Edited 3:36am
Quoting capitalist88
... In order to have a positive expectancy:
W > L / (G + L) ...
At first I have not catched the meaning. That is quite right.

The main sence of the inequation is methodical.
I add a few words. Dark blue domain at the diagram have a positive expectancy.

Separate line shows the same, but with probability of Null Transaction .2
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