Taking Profit > Stop Loss. Why?

I must say I am very surpirsed at the varying amount of opinions expressed on such a simple concept. I guess this is an example of human nature making things more complicated than it has to be.

Why TP > SL? Simply because if you win more than you lose...you make money...PERIOD. This has to be a basic concept of trading or you might as well study plumbing.

In every aspect of your trading plan you MUST strive for more money than you lose. That goes for EVERYTHING including your win/loss ratio too. If you win 51% of the time AND if each winner makes more than each loser...you are making money.

If you can find a method of entry/exit that is greater than 51% accuracy all the better...but in each trade you must strive to make more money than you are losing. No matter how you look at it...averaged, or individually.

HOW you go about doing this depends greatly on your trading method, your risk appetite, and your maturity as a trader...but everything must be geared toward making more than you lose or this is all just academic.

If my winning ratio is less than 40% which mean i win 4 trade out of 10 but I still make money. Is it a good stop loss and take profit

Leo

I would encourage you to find a way to improve the accuracy of your entry signal. 40% is not very good even if you're currently making money. There are many other systems out there with better accuracy, and even a single moving average produces a better rate.

With that kind of accuracy I imagine you would have to have a take profit that is around 4-5 times your stop loss...that part is OK...but if you can improve your accuracy you will be way better off...I've never yet seen a system with less than 51% accuracy that didn't eventually fail.

40% isn't even an "edge"

It is a deceptive concept, I'm not sure I'd say it's basic. You're assuming that the increase in profitability is greater than the decreasing frequency of wins.

To the original poster, I'd toss the R:R cliche in with a whole host of other misleading trading 'gems'.

I'm afraid I must strongly disagree. The concept is not deceptive and is at the very core of trading for gain. You MUST make more than you lose or you will LOSE...there is no other concept. By aiming for more than you are risking this is a basic concept of any SUCESSFUL trading plan.

You can be 99% accurate in you entry. Make 10 pips on each trade but if you have a 100 pip stop loss you will eventually hit it. That will not only wipe out your last 10 trades, but it will take you another 10 to get back to that point...call it break even. 20 trades! Not worth it.

It is much saner to find a method of entry that has at least 51% (I would say 55%) accuracy and then always shoot for more than you risk. Granted the market doesn't always provide what you're aiming at but then if you manage trades actively reducing risk as you go, this will go much farther than setting a large stop loss on the theory that "its more likely to make 10 pips than lose 100"...You WILL lose eventually...why lose 100 when you only have to lose 10 or 20? Why gain 10 when you can gain 50 on the same entry?

If this is about as straight forward as it gets. Don't complicate a simple concept. Just use it to your advantage. Win more than you lose...strive for that on each and every trade. Accept your eventual losses as part of the game knowing you've controled what could've been something much worse. Try to allow your winners the full advatage of a given run. Elimiate risk early by taking profit on 1/2 position or moving stop to BE.

If these concepts are too deceptive, it may be time to try something easier to understand.

The day I stopped using this stupid TP>SL risk/reward BS I became successful. It's all just about probabilities, nothing more, nothing less.

edit: So to say I have a horrible risk/reward ratio regarding the TP and SL.

Thanks for the 'enlightenment' gspajon but you're still missing the point. Xaron already pipped me to the post - it's about probabilities. It is deceptive as evidenced by you saying you need to aim for more than you risk. You don't. At all.

Expectancy is a function of both win size and win rate. You can be overall profitable with (for example) a 40% win rate and (average) 2:1 RR, or a 90% win rate and 1:2 RR.

Assuming that a 50% win rate is always attainable, no matter what the RR, is a complete fallacy (if it were true, we'd all be forex millionaires, LOL). But alas, win size and win rate are approximately inversely proportional to each other. In other words, if you aim for higher RR, you'll reduce your win rate proportionally. Everything else being equal, price will reach a 20 pip target twice as often as it will reach a 40 pip one. That makes gaining a statistical edge from a 'primitive' TP/SL exit method extremely difficult (i.e. unless one employs TA-based considerations).