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Risk Reward: 1:1, 1:2 or 1:3

  • #41
  • Edited 7:41pm Nov 6, 2010 7:27pm | Edited 7:41pm
Hi
I might have a lopsided risk reward ratio I am not trading a live account yet but i have traded an oanda demo account for about three months. I have traded stocks for three years and have spent many hours learning .I usually set a stop loss of 7 percent or higher depending on the volitility of the stock price and always trade with the least line of resistance (overall market trend) and i of course would in most cases take a higher profit.
With the forex market I have been setting a stoploss of 100 pips and a take profit of 15,20,25,30, or even 40 pips depending on which pairs i am trading I have a system where all of my trades are based on breaks of resistance and support on a crucial time frame that has really blown me away as far as results. I have traded this system for about 1 month with about 20 trades 1 of my trades hit the 100 pip stop loss 16 trades hit my target and 3 or so trades i manually closed out due to the expiration of the system i use. Unfortunately i do not no of a single stock trader or a single forex trader personally. So i am excited to finally join a forum. Not here though to brag about my system because when i open my live account things probably won't be the same as i have came up with systems in the past that have not held up. Bottom line i just think its weird that risk reward in the stock market can be so different than the forex market because i would never set a stoploss more than what i expect to profit.

Just wondering if an oanda practice account or other brokers practice accounts have any flaws that don't match the real market. I am having a hard time really believing that my system works. I set my all my orders before i go to bed and wake up 5 to 10 percent richer every morning on average using 20 to 1 leverage an not always using my full margin power. I do believe ignorance is bliss as i have only been trading forex for a few months but with a general idea on how to trade. obviously i have made only abot 20 trades so i do expect things to go south. Any how if any body can answer my question it would be highly appreciated.
My trades are 100% profitable 65% of the time!
  • #42
  • Edited 9:51am Nov 8, 2010 8:13am | Edited 9:51am
Quoting jimmyjames79
Hi
I might have a lopsided risk reward ratio I am not trading a live account yet but i have traded an oanda demo account for about three months. I have traded stocks for three years and have spent many hours learning .I usually set a stop loss of 7 percent or higher depending on the volitility of the stock price and always trade with the least line of resistance (overall market trend) and i of course would in most cases take a higher profit.
With the forex market I have been setting a stoploss of 100 pips and a take profit of 15,20,25,30, or...
Hi. Why do you use so bad r:r ratio? I mean your SL much bigger than take profit. I think it is easier to trade 1:1 ratio. so if you lose you lose 2% (or 5%) if you win you get 2%. So you need to 60:40 win:loss ratio and you can make money
  • #43
  • Nov 8, 2010 10:25pm Nov 8, 2010 10:25pm
Quoting wskeal
Hi. Why do you use so bad r:r ratio? I mean your SL much bigger than take profit. I think it is easier to trade 1:1 ratio. so if you lose you lose 2% (or 5%) if you win you get 2%. So you need to 60:40 win:loss ratio and you can make money

Yes you may be right. But keep in mind that risk reward is relative to your trading style. You find a style you like then tweak your risk reward to benefit to your style. The tighter your stop the more likely it is going to hit and the opposite for your take profit the lower your take profit the more likely it is going to hit. Now if i find out my ratio of winning trades is 50% then i will be in deep shit. But since my stop loss is 100 pips against the trend after resistance or support is broken I am only asking for a small but probable profit. And I only play trending currencies because resistance or support is easily broken. Think about elliot wave theory people buy, the currency trends up and the first top comes apparent after the first selloff
i let the sell off happen an set a buy limit 10 pips above the first top. If it does not hit no problem no loss it was not a true ralley but if it does ralley above the first top probability tells you that 20 to 30 pips is obtainable. I realised in the stock market i would never set a stop with that risk reward ratio but in the forex market a currency can move 100 pips in relatively a short time. I was less profitable with a 50 pip stop loss and way less profitable with a 1:1 risk reward. Any how the reason why i came up with 100 pip stop loss is because i backtested this system wich uses no indicators. Now the logic is always correct if your system agree's with it.

Keep in mind I am a rookie in Forex as i have mentioned and am still tweaking the new issues that are coming up. Like I said you could be right relative to my system of course.
My trades are 100% profitable 65% of the time!
  • #44
  • Nov 8, 2010 11:59pm Nov 8, 2010 11:59pm
trading is such a personal experience that I dont think there can be a right or wrong answer to this question.

It is up to each trader to figure out for themselves what method of profit taking is used for each different method or system or however you enter the market.

I for example manually move my stop loss as the trade moves in my favour. Using swing high/lows and support/ resistance to protect my stop.

I do calculate RR after my trades are closed but this is purely to keep score. I average less than 1R but my biggest win was 10x risk.

So to the original poster.. keep experimenting and eventually something will just "feel right" for you.

cheers
  • #45
  • Nov 9, 2010 4:28pm Nov 9, 2010 4:28pm
Quoting brenzaj42
I trade off of daily charts(taking in account the weekly and 4 hour chart, commonly known as MTFA) and usually only use a 50 pip stop. I will only enter the trade if it is at least 100 pips away from the nearest resistance. That is the bare minimum which is 2 to 1. However, most trades have potential to go 1000 pips which is great RR. I win about 80% of the time and average around 4000 pips a month. I guess the moral of this story is that daily charts will give you great RR when traded correctly.
I suppose you have a very simple trading system. I am trying not to get to technical myself as the best trading methods are no brainers. Most people seem to complicate things way too much. The day and weekly charts actually show the line of least resistance. Your rr is obviously based on buy and hold methods (swing trading) so it makes sense that you have a great rr.
My trades are 100% profitable 65% of the time!
  • #46
  • Dec 11, 2010 8:15am Dec 11, 2010 8:15am
Here's what I do. I plan my trades based on Elliot Waves and Fibonacci calculations. I don't use any indicator. The charts that I use are MN, W1, D1 and H4. The entry always happens on H4 timeframe. Sometimes, not always, if a certain count is not clear on H4 chart, I will go down to hourly chart just to make sure where I am in a count. And based on that, I place an order at a certain fib retracement or extension. That depends what count I'm looking at. And I always put my stop loss 1 pip below the count invalidation point. Actually 1 pip should be considered too much, cuz invalidation is invalidation no matter what. But because we're dealing with high leveraged market here 1 pip shouldn't be considered anti-Elliot. If you are familiar with Elliot Waves then you'll know what I'm talking about. And based on that I always use risk/reward ratio of at least 1 to 10. Sometimes 1/11, 1/12, it depends on the count. I know it sounds crazy but it really works great for me. There's more. Most of the time, my stop loss gets hit. Once it's hit, I try next retracement or extension level (the count not being invalidated). And I get stopped out again. So I go 1 level further. And almost always, third time the price finally starts to go along with the count and my profit targets gets hit. As a result, for example if I use a stop of 30, then my final result turns out to be (-30 x 2) + (30 x 10) = 240 Pips of profit. Hope this helps. BTW, my trades usually last from 2 days to 1 week. And I take about 1 or 2 trades each week.
  • #47
  • Oct 1, 2011 1:01am Oct 1, 2011 1:01am
Quoting jimmyjames79
Hi
I might have a lopsided risk reward ratio I am not trading a live account yet but i have traded an oanda demo account for about three months. I have traded stocks for three years and have spent many hours learning .I usually set a stop loss of 7 percent or higher depending on the volitility of the stock price and always trade with the least line of resistance (overall market trend) and i of course would in most cases take a higher profit.
With the forex market I have been setting a stoploss of 100 pips and a take profit of 15,20,25,30, or...
I'd be interested to see how much real money you are using for this, as at best the risk:reward ratio is 2.5:1 (100/40), and in terms of money management, you're risking 25% of your account for a 10% gain.

On a positive point, if you have maintained a percentage of profitable trades at 95%, then you would have done well.
Good judgement comes from experience. Experience comes from bad judgement.
  • #48
  • Oct 2, 2011 3:36am Oct 2, 2011 3:36am
Quoting Wallboroff
The Risk Reward question bothers me again and again.

I´m not really sure which one to take. Obviously the 3:1 RR seems to be the most profitable one but is that really true?

I mean, it is hard to get a winner that is three times my potential risk.

Catching a winner that has the same amount of pips like my risk is much easier to get.

Has anybody experiences with that topic? Personally i always tried the 2:1 RR and it was ok. Now im testing the 1:1 RR and the winners come much easier.


What do you guys think about this?
From trading psychology perspective, take the RR ratio that you feel most comfortable with. If the RR ratio that you are comfortable with does not net you the profit, work on the entry. Basically wait for a better entry price than one that you would have chosen now. This requires more patience and potentially more missed good trades. But that should be ok as long as you have a net positive profit at the end of the month.

If you are consistently net positive for an "extended period of time" , then you can work on your trade size to increase your profit.

I personally feel that there is no point adopting a RR ratio that you are not comfortable. If you feel dis-stress, it may affect the clarity of your trading decision.

Slow and easy is the name of the game. It has got to be easy on the trading psychology.
  • #49
  • Oct 2, 2011 7:06am Oct 2, 2011 7:06am
it doesnt work to apply 1:2 1:3 1:4 logic to mm... the idea is to find a system that allows an average of 1:? over x trades with exits built in where the exit isnt a fixed position from start... that way it can be 1:1 or up to 1:500
  • #50
  • Oct 2, 2011 7:37am Oct 2, 2011 7:37am
Quoting domino
it doesnt work to apply 1:2 1:3 1:4 logic to mm... the idea is to find a system that allows an average of 1:? over x trades with exits built in where the exit isnt a fixed position from start... that way it can be 1:1 or up to 1:500
If you have the discipline, then you can do this, but I'd like to see your average losses versus your average profits, to see what your risk:reward ratio is.

Personally, I think it's easier to have everything defined, then there is less chance of any biases creeping in and ruining any potential.
Good judgement comes from experience. Experience comes from bad judgement.
  • #51
  • Oct 2, 2011 4:57pm Oct 2, 2011 4:57pm
Quoting Reactor
I'd be interested to see how much real money you are using for this, as at best the risk:reward ratio is 2.5:1 (100/40), and in terms of money management, you're risking 25% of your account for a 10% gain.

On a positive point, if you have maintained a percentage of profitable trades at 95%, then you would have done well.
Right now I only have about 916.00 $ invested. Not much money but to me irrelevent. I'd trade this system with any amount of money. Right now i only risk 2 % to 3 % per trade and take profit in general around 1 to 2 % per trade. So basically i still don't have an even risk reward on my bar break strategy. But have allowed my winners to ride longer and set my stop even in some situations.

When i play support and resistance trades my risk is much less then my reward.

I really don't care much anymore about risk reward though I put my stops in places i don't think they will hit (outside the bar range you are trading) The last thing i want is a minor correction to stop me out.

Shorts may get squeezed and longs trying to catch a falling knife may
come in but the majority of time only equals a dead cat bounce!

Any how currently I am up about 31% since i opened my live account on July 11th 2011. With a 6 % drawdown in the volitile month of august where my stops were not large enough. I only spend about 15 minutes setting up my limit orders stops and take profits. Sometimes i manipulate the orders if there still running the next morning.

Also each currency pair i trade gets it's own personal attention when it comes to placing stops and take profits all based on the way it's been acting in previous but close to its present time.
My trades are 100% profitable 65% of the time!
  • #52
  • Oct 3, 2011 1:31pm Oct 3, 2011 1:31pm
Quoting Reactor
If you have the discipline, then you can do this, but I'd like to see your average losses versus your average profits, to see what your risk:reward ratio is.

Personally, I think it's easier to have everything defined, then there is less chance of any biases creeping in and ruining any potential.
the market is a living thing.. constantly expanding and contracting volume is increasing and decreasing.. its always changing.. it become volatile and less volatile.. its processing new information all the time with new reactions.... its like roping off part of the ocean and saying ... I think ill just fish in here..
  • #53
  • Oct 3, 2011 2:20pm Oct 3, 2011 2:20pm
I personally use a rule of minimum 1:3 for swing/position trades and min 1:1 for day trades. My money management then collects anything over and beyond.
  • #54
  • Oct 3, 2011 2:26pm Oct 3, 2011 2:26pm
To summarize...


Figure out/find a system that you can squeeze in the highest amount of winning probability with R:R of ATLEAST 1:1

60% win ratio with 1:1 is better than
30% win ratio with 1:2 is better than
10% win ratio with 1:5.


Compounding makes it even more worse if you have a low win expectancy, because it takes more wins to get out of ditch and actually grow your account.



70% win ratio with 1:1 is a system that can make you a millionaire in a year's time.
  • #55
  • Aug 21, 2012 11:10am Aug 21, 2012 11:10am
Know your Risk: The Risk-Reward Ratio

Risk is a part of trading. Every trade carries a certain level of risk. Every trader must know the amount of risk that is being assumed on each trade. Knowing the amount of risk on each trade is one way to limit it and to protect your trading account. The best way to know your risk is to determine the risk-reward ratio. It is one of the most effective risk management tools used in trading.

The risk-reward ratio is a parameter that helps a trader to determine the level of risk in a trade. It shows how much a trader is risking versus the potential reward (or profit) on a trade. While this may seem simplistic, many traders neglect taking this step and often find that their losses are very large.


How to Determine the Risk-Reward Ratio?

The first step is to determine the amount of risk. This can be determined by the amount of money needed to enter the trade. The cost of the currency multiplied times the number of lots will help the trader to know how much money is actually at risk in the trade. The first number in the ratio is the amount of risk in the trade.

The reward is the gain in the currency price that the trader is hoping to earn from the currency price movement. This gain multiplied times the number of lots traded is the potential reward. The second number in the ratio is the potential reward (or profit) of the trade.

Examples

Here are a few examples of the risk-reward ratio:

If the risk is $200 and the reward is $400, then the risk-reward ratio is 200:400 or 1:2.
If the risk is $500 and the reward it $1,500, then the risk-reward ratio is 500:1500 or 1:3.
If the risk is $1,000 and the reward is $500, then the risk-reward ratio is 1000:500 or 2:1.

What is a Good Risk-Reward Ratio?

The minimum risk-reward ratio for a Forex trade is 1:2. However, a larger ratio is better. An acceptable risk-reward ratio for beginning traders is 1:3. Any number below 1:3 is too risky so the trade should be avoided. Never enter a trade in which the risk-reward ratio is 1:1 or the risk outweighs the reward.

Many experienced trader will only enter trades in which the risk-reward ratio is 1:5 or higher. This requires that the trader wait for a trade with this ratio, but the reward is worth it. A higher risk-reward ratio is a good idea in case the currency does not make the anticipated price movement. However, if the trader uses a lower risk-reward ratio, there is very little room for smaller price movements and the amount of risk will increase.

The risk-reward ratio is an important risk management and trading tool. It is important for beginning traders to take the extra time to perform this task because it can help to minimize risk in every trade. Waiting for the right risk-reward ratio can take a long time. However, the benefits of waiting for a higher risk-reward ratio are worth the effort and patience. You will know your risk and know your potential profit. Most importantly, you will know whether the trade is worthy of your money.
Some pursue happiness, others create it.
  • #56
  • Aug 24, 2012 9:26am Aug 24, 2012 9:26am
Whenever I read these posts, it seems to me that there is a split with a bunch of people cheering on a 1:1 ratio and another holding out for the 1:3 ratio.

What I've noticed, at least on the various systems I've been trying out, is that price will often hit a 1:2 ratio but it will rarely hit a 1:3 ratio. At least from a day trading perspective.

So why not go for 1:2?

Some would counter that, using this logic, a 1:1 ratio would be even better, but the fact is that in such situations you're chewing through a lot of broker commission. Your cutting your cost to trade in half by going with a 1:2 ratio. The counter argument would be that the increase volume of trades would make up for any commission cost. I'll conceed that point as well.

This leaves us with the final (I think) argument which goes in favor of a ratio of 1:2 or better. That would be slippage.

This will become a very big issue if one is trading larger lot sizes and both a tight stop and tight take profit level. Receiving 2 pips worth of slippage every now and then when running a 10-12 pip stop loss and a 10-12 pip take profit with a trade size of 100 lots is 20 percent and can destroy a profitable system. The same 2 pips of slippage every now and then when running 10-12 pip stop loss and 20-24 pips take profit using the same might fall within acceptable tolerances when the system is averaged out over a large enough sample size of trades. This is especially true if you're using a trailing stop at the 1:2 point which allows you to grab and extra 2-7 pips ever 2 or 3 successful trades to make up for the slippage that does occur. I don't think that these types of benefits are not to be found at an equally effective level on a 1:1 ratio approach to the markets.
  • #57
  • Aug 25, 2012 11:51pm Aug 25, 2012 11:51pm
If you trade at the edges of a market your risk will be small while your reward will be great. Trading in the middle is what kills most traders.
  • #58
  • Aug 26, 2012 8:00am Aug 26, 2012 8:00am
Quoting Wallboroff
The Risk Reward question bothers me again and again.

I´m not really sure which one to take. Obviously the 3:1 RR seems to be the most profitable one but is that really true?

I mean, it is hard to get a winner that is three times my potential risk.

Catching a winner that has the same amount of pips like my risk is much easier to get.

Has anybody experiences with that topic? Personally i always tried the 2:1 RR and it was ok. Now im testing the 1:1 RR and the winners come much easier.


What do you guys think about this?
IMO, the answer you are/were seeking is simple, but it will not come easily for a number of reasons. Chief among them, RR is not independent of Hit Ratio, therefore the right answer may vary dramatically across systems, which takes us to the realization that a proper answer will not come up without doing some work like you're doing.

The work consists of 2 main stages:

1) backtest of the system you intend to use in order to find the numbers associated with any given stop/target being hit,

2) design your MM business style based on the probabilities you found while backtesting in order to get all your expenses covered assuring profit will be the only likely possible outcome.

Examples:

1. The case of unfavorable RR) let's assume you just finished stage 1 of your work. Your backtest shows that:

128 times stops hit
572 times 0.75*RR hit

Expenses*: 128*1 = 128
Income: 572*0.75 = 429
I-E = 429-128 = 301 = profit

*(lets assume all spreads/commissions/slippage/etc are already covered under expenses)

You could use a single TP with unfavorable RR and consequently no BE and still end up being profitable using this system.

2. The case of unfavorable HR): again let's assume you just finished collecting your data and it shows:

400 stops hit
300 2*RR hit of which 100 would have returned to BE and 200 would have hit 4*RR

Expenses*: 400*1 = 400
Income: (300*2*0.5)+(200*4*0.5) = 700
I-E = 700-400 = 300 = profit

So now you know you are likely to make a profit using this particular unfavorable HR system by splitting position into 2 halves, closing 1st half @ TP1 (2*RR), moving to BE, and finally closing 2nd half @ TP2 (4*RR)/BE.

My 2 pips, and good work.
"To hold, you must first open your hand. Let go." - Lao Tzu
  • #59
  • Aug 27, 2012 4:47am Aug 27, 2012 4:47am
The way you guys are looking at RRR i must say, in my opinion is a horrible way, to be quite blunt. I ONLY take trades that are 1:3 or HIGHER sometimes, a 2:1, SOMETIMES if the situation just looks too good to pass, but i would NEVER EVER EVER EVER EVER take a 1:1 RRR trade, even if 100 of them came as an opportunity, i wouldn't even give those trades the time of night, to get a healthy, growing account you MUST have a good RRR, 1:1 is gambling, 50/50 odds, and if you take in spread, you are actually lower than 50/50 odds, think of that? If you want to trade that way, take your money to the casino where the drinks are free! And if the market starts to reverse ahead of your target, no problem, pull your trade early and wait for another trade to come your way ^^ Keep the losers small, and the winners big, that's how you grow a long living healthy account, i make about 6-8% on demo right now a month, in only about 4 trades, i am patient, i wait for the perfect setups with the right RRR, and pull the trigger, 4 trades, and might i add, one of those was a loss This isn't rocket science, think about it, give it some thought, and if you wanna learn more, hit me up, hope this helped guys!
  • #60
  • Aug 27, 2012 9:10pm Aug 27, 2012 9:10pm
Quoting Wallboroff
The Risk Reward question bothers me again and again.

I´m not really sure which one to take. Obviously the 3:1 RR seems to be the most profitable one but is that really true?

I mean, it is hard to get a winner that is three times my potential risk.

Catching a winner that has the same amount of pips like my risk is much easier to get.

Has anybody experiences with that topic? Personally i always tried the 2:1 RR and it was ok. Now im testing the 1:1 RR and the winners come much easier.


What do you guys think about this?

It really depends on the market and whether it is range or trending.

If it's range it makes more sense to play the range provided you know how to define the range. With that you also risk losing out should the range break in your favor.

Getting a multi hundred pip move can be pretty hard, you need a catalyst and then you need to know what that catalyst is before hand. The catalyst isn't always what you think it might be.

Time wise it can be more advantageous to play the range. You're in the trade less which means less risk and less cost because you avoid roll-over a good part of the time which isn't the case if you hold the pair a few weeks or longer.

yeah 1:1 winners are much, much easier... less time too. But they aren't always advantageous... only when markets are range.
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