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

  • #61
  • Aug 27, 2012 9:25pm Aug 27, 2012 9:25pm
here is my take on this when talking about money management.... that is the only side of trading that needs to be meticulously planned out and have a system for.

the Analysis part is more of a flexible, educated guess sort of thing.


three basic guidelines that keep you profitable given you have the ability to guess the direction right 50% of the time is.

R≤ 1%
where R is the risk and 1% implies risk to account

[(p+tp)-(p-sl)> (μ+ sd(2)) - (μ-sd(2))]< [(μ +sd(3)) - (μ-sd(3))]

where p is the current price at which you transacted, tp is your take profit, sl is your stop loss.
μ is the average price you are using to calculate sigma, I use 24h
sd is Standard Deviations (i use of 24h)

and rule number 3

current loss should always be 85%≤ of previous profit. as to always have a positive 15% expectation aka the house edge.
AVT INVENIAM VIAM AVT FACIAM
  • #62
  • Aug 27, 2012 9:41pm Aug 27, 2012 9:41pm
Professional traders don't take trades at less than 3 to 1. Do some simulations with different winning percentages and different r/r ratios. Unless you are over 70% accurate (which few are in the long term) 3 to 1 is a must if you want any kind of capital growth.
  • #63
  • Aug 27, 2012 9:44pm Aug 27, 2012 9:44pm
I'll translate that to plain English if the math doesn't make sense to you

1 risk less or equal to 1% of account

2- of an average of 24 hours if you are intra day, of a month if you are a position or swing trader, standard deviations x 2 is the same as bollinger bands with setting of 24,2 for an hourly chart or 22,2 or 20,2 for a daily chart to get a monthly average.

so basically your bollinger bands give you a read for volatility make sure your targets are greater than the regular BB but less than a BB with settings of 3 for standard deviations. the goal here is to keep away from normal volatility but be stopped out if it is a direction change as 3 standard deviations should statistically encompass 100% of price movement if it is oscillating normally to have a price move beyond that is no longer an outlier.

the last rule is that every time you are stopped out make sure your losses equal to or are less than 85% of previous profit.

these are basic risk management guidelines

as you already figured out your position size needs to allow for normal volatility without violating rule one
AVT INVENIAM VIAM AVT FACIAM
  • #64
  • Aug 27, 2012 9:47pm Aug 27, 2012 9:47pm
Quoting rCrumb
Professional traders don't take trades at less than 3 to 1. Do some simulations with different winning percentages and different r/r ratios. Unless you are over 70% accurate (which few are in the long term) 3 to 1 is a must if you want any kind of capital growth.
with all due respect I think you are not being realistic here.


1:3 risk reward or any R:R for that matter is specious.

you CANNOT determine your R:R it is the market that determines the volatility and direction, it is all subject to change.... the market moves more randomly than people want to admit.
AVT INVENIAM VIAM AVT FACIAM
  • #65
  • Aug 27, 2012 9:59pm Aug 27, 2012 9:59pm
redlion,

I respect your opinion but have to disagree. I only take trades with a r/r ratio of 3 to 1. I've gotten as much as 10 to 1 and I've been profit stopped out many times at around 2 to 1. My average r/r ration is 3.27 to 1 over several thousand trades.

If you can define and play the edges of a market you can routinely find 3 to 1 or greater trades. My accuracy is only around 50% but risk/reward makes up for a lot of mistakes. With a good r/r and a 50% accuracy on trades I rarely have a losing month.

Everyone has a different trading style and not everyone will frame a trade the same way. I am lucky to know a few professional traders and they all (all three of them) will only take trades with an r/r greater than 3 to 1. Obviously it isn't an exhaustive sample.
  • #66
  • Aug 27, 2012 10:36pm Aug 27, 2012 10:36pm
For the doubters in less than 1:1 RR/believers of 1:3 RR, here's a copy/paste of a PROFITABLE friend's myfxbook (not publishing link cause he might not like it, but i assure you these stats are real). Also i expect everyone here to know how to interpret trading data.

Here it is:

Trades:2111
Profitability:
Pips:4020.8
Average Win:9.94 pips /
Average Loss:-14.33 pips /
Lots:
Commissions:
Longs Won:(495/744) 66%
Shorts Won:(917/1367) 67%
Best Trade(€):
Worst Trade(€):
Best Trade (Pips):(Jul 27) 111.6
Worst Trade (Pips):(Jun 11) -164.1
Avg. Trade Length: 3h 4m
Profit Factor: 1.21
Standard Deviation:
Sharpe Ratio: 0.06
Z-Score (Probability): -16.00 (99.99%)
Expectancy: 1.9 Pips /
AHPR:0.02%
GHPR:0.02%

Open your mind guys. 90ish% of traders lose... just because most here agree on something says jack about it being true... learn to think for yourself.
"To hold, you must first open your hand. Let go." - Lao Tzu
  • #67
  • Aug 27, 2012 10:42pm Aug 27, 2012 10:42pm
Quoting stevegee58
A 90% win rate with a 2:1 reward:risk is the holy grail.
Stevegee I agree entirely with you on that, of all the ratio's the 2:1 is definitely the 'sweet spot'. 1:1 can be like playing profit ping pong with your broker and anything from 1:3 (much like 1:1) and above means you need a damn good methodology. 2:1 however is highly achievable whereby you can still be profitable even while being only 33% successful. As long as you have the trade on the right side of the trend there is no reason why one could not do better than 33%.

Regards xen
  • #68
  • Aug 27, 2012 10:52pm Aug 27, 2012 10:52pm
You realize that at 2:1 with a 33% accuracy you break even before brokerage? This is not a great recipe. When you consider human error, slippage and brokerage not to mention long losing streaks this is a very hard way to make meaningful money and stay emotionally in control of your trading.

There aren't a lot of people that are 90% accurate. There aren't a lot of people in the learning stage who are above 50% accurate. If you don't want to blow up an account while learning pay attention to risk/reward.
  • #69
  • Aug 27, 2012 11:00pm Aug 27, 2012 11:00pm
Quoting rCrumb
You realize that at 2:1 with a 33% accuracy you break even before brokerage? This is not a great recipe. When you consider human error, slippage and brokerage not to mention long losing streaks this is a very hard way to make meaningful money and stay emotionally in control of your trading.

There aren't a lot of people that are 90% accurate. There aren't a lot of people in the learning stage who are above 50% accurate. If you don't want to blow up an account while learning pay attention to risk/reward.
I would agree that a 33% success rate on a 2:1 would be a worse case scenario, surely if your keeping with the trend it would be better?

Xen
  • #70
  • Aug 28, 2012 8:40am Aug 28, 2012 8:40am
Quoting xenios
I would agree that a 33% success rate on a 2:1 would be a worse case scenario, surely if your keeping with the trend it would be better?

Xen
My system doesn't follow the trend, so I can't say how that impacts performance, but I'm about to begin trading a method that targets an average of 2:1 and scores greater than a .33 win ratio in historical testing.

I've got to put in a disclaimer, though, that I utilize a trailing stop which kicks in at the 2:1 point....so there is no hard win at 2:1. Some of the wins turn out to be 3:1 or even an occasional 4:1 (about 1 out of every 350 trades) which tend to bring that ratio up.
  • #71
  • Aug 28, 2012 9:09am Aug 28, 2012 9:09am
Quoting FXAssassin
My system doesn't follow the trend, so I can't say how that impacts performance, but I'm about to begin trading a method that targets an average of 2:1 and scores greater than a .33 win ratio in historical testing.

I've got to put in a disclaimer, though, that I utilize a trailing stop which kicks in at the 2:1 point....so there is no hard win at 2:1. Some of the wins turn out to be 3:1 or even an occasional 4:1 (about 1 out of every 350 trades) which tend to bring that ratio up.
How much is the trailing stop? If the trailing stop is hit below 2:1 that will also bring down the ratio. I think your system will require plenty of patience to catch that trend reversal run that pays you back all your losses - IF it happens AND you catch it. Your position size might also be too small (if you lower position size with losses) and the hole too big to make it back on a big run. I honestly believe you would have better chances of success if you used a trailing stop strategy in the direction of the trend. Just my opinion.
  • #72
  • Aug 28, 2012 9:39am Aug 28, 2012 9:39am
Quoting 2+2=4ex
How much is the trailing stop? If the trailing stop is hit below 2:1 that will also bring down the ratio. I think your system will require plenty of patience to catch that trend reversal run that pays you back all your losses - IF it happens AND you catch it. Your position size might also be too small (if you lower position size with losses) and the hole too big to make it back on a big run. I honestly believe you would have better chances of success if you used a trailing stop strategy in the direction of the trend. Just my opinion.
The trailing stop varies between 2 pips and 3 pips behind the price. It also "jumps" instead of trailing at simple 1-pip increments. This is all handled automatically by the trade manager....that is, switching from 2-pips to 3-pips trailing.

As for bringing the ratio down, testing so far has shown that enough of the trades will close out at 22 or 24 pips to balance out the ones that close at 18 pips so that the average is 20 pips. Really, the only reason that I leave a trailing stop in there at all instead of just taking profit at 20 pips with a hard T/P is because about one in every 10 trades the price runs into profit 30+ pips. I want to still be in the trade when that happens. I think that the setup is about as good as it's going to get. Average 20 pips on most wins and still be around to grab wins with 1:3 or 1:4 Risk/Reward.

As to the trend thing. I've found that looking for the higher trend to influence the 5 minute charts is an exercise in futility when targeting 20 pips in profit. The fact of the matter is that my trades typically last for no more than 30 minutes. The only trend that matters is the one you see formed on the last 20 or 30 five minute bars...and even that should only be given a token of respect on the 5 minute charts where things often reverse the very next candle.

Each to his own...but I think that the axiom of "the trend is your friend" applies less to scalpers and short-term day traders (I think I fall into the latter category) than it does to those who trade with wider stop losses and look for a greater number of pips before punching out with their profit.

To be honest, I think that this is why so many people shun lower time frames saying things like "Don't trade the lower time frames, there's too much noise." What they really saying (though they don't know that they're saying it) is, "The golden rule of The-Trend-Is-Your-Friend doesn't seem to work well on the lower time frames. Since we can't every question this golden rule, that means that the market behavior we see on lower time frames is "noise" and should be avoided. Only trade time frames and strategies where the trend really IS your friend!"
  • #73
  • Aug 28, 2012 11:20am Aug 28, 2012 11:20am
It all depends. Take a system with 75%win 1:1 another with 50 % 2:1 and 40 3:1. Let's say you make 10 trades a month on each system. Which is the best?
The 40 %system will be best performing coz it has the highest expectancy. But in reality the 75% system is the most satisfying to tradse coz the chances of long losing streaks is minimized and you can risk larger bet sizes. Add some low correlation diversification and you'll have peace of mind like you've never known.
wo-yoy! wo-yoy! wo-yoy! wo-yoi! wo-yoy-yoy-yoy!
  • #74
  • Aug 29, 2012 3:50pm Aug 29, 2012 3:50pm
IMO what is more important than risk:reward is average win:average loss. For a discretionary price action trader, as your understanding of price improves you will manage risk on the trade more dynamically and effectively based on what price is telling you. avg R:R is too simple to take this into account.

For example:
your initial stop is 30 pips. once price reacts at the level which you entered, deals in a range and begins to move in your direction, you move your stop to just under the low.

25% of the time you take a full stop.
25% of the time you take a -15 stop.
25% of the time you take +20 on half and breakeven on the rest.
25% of the time you home run 100 handles (yea!)

R:R is for literally placing a trade, walking away and all or nothing. I dont know any successful trader personally that trade like this on a consistent basis. Not that it cant be done, but the point is you evolve as a trader as your understanding of price develops.



Z
  • #75
  • Aug 30, 2012 4:03am Aug 30, 2012 4:03am
Quoting zxc000
IMO what is more important than risk:reward is average win:average loss. For a discretionary price action trader, as your understanding of price improves you will manage risk on the trade more dynamically and effectively based on what price is telling you. avg R:R is too simple to take this into account.

For example:
your initial stop is 30 pips. once price reacts at the level which you entered, deals in a range and begins to move in your direction, you move your stop to just under the low.

25% of the time you take a full stop.
25%...
Yours is one of the most sensible posts on the thread, however i disagree with a tiny bit: the Average win: Average loss expression. R:R alone is indeed oversimplistic, cause RR is not independent of hit ratio% (probability of win). Both RR and hit ratio% when taken alone are literally meaningless. RR varies inversely to hit ratio%. The farther a target or stop is the less likely it will be hit and vice-versa. As traders we should find the perfect balance between stop and target sizes in this RR-hit ratio continuum for every system/method we use. That said, the expression Average win: Average loss lacks vital information. It doesn't take into account Win/Loss probability, and as such it's useless to us as traders. The correct expression is expectancy [(Probability of win * Average win) – (Probability of loss * Average loss)], and of course we want it to be a positive number, the higher the better.
"To hold, you must first open your hand. Let go." - Lao Tzu
  • #76
  • Sep 1, 2012 6:07pm Sep 1, 2012 6:07pm
Quoting zxc000
IMO what is more important than risk:reward is average win:average loss. For a discretionary price action trader, as your understanding of price improves you will manage risk on the trade more dynamically and effectively based on what price is telling you. avg R:R is too simple to take this into account.

For example:
your initial stop is 30 pips. once price reacts at the level which you entered, deals in a range and begins to move in your direction, you move your stop to just under the low.

25% of the time you take a full stop.
25%...
I hope you are using the Geometric average otherwise your results will be skewed.
AVT INVENIAM VIAM AVT FACIAM
  • #77
  • Sep 1, 2012 6:22pm Sep 1, 2012 6:22pm
Quoting the redlion
I hope you are using the Geometric average otherwise your results will be skewed.
huh? geometric mean is the only correct mean when averaging normalized results; this I don't expect to be the case for win/loss...
  • #78
  • Aug 14, 2018 4:04am Aug 14, 2018 4:04am
Before anything I have to mention that i'm not a winning trader yet, but lately I have made some nice profits with around 1:2, 1:3 and 1:4. Despite this, at the end I've always wiped out my accounts.

BUT:



Let's consider these facts:

-the most important reason for wiping out accounts is trading psychology
-lack of patience -overtading- you decide to trade every day from 10-13. but with 1:2 and above it's not that easy to ind good spots
-not being able to handle the pressure of holding large winning positions-more importantly being unable to make objective decisions when having large winners or loosers
(e.g. you have made a 1:5 already and you can't decide if you should hold it longer or close it)
-not being able to make objective decisions after loosing 1-2-3-+++ trades in a row (fear of loosing more, but also you want to earn it back asap)


-forex prices are ranging 66-75% of the time, and that's something where it's hard to make anything over 1:2


Let us assume that:

  1. -you have 1000usd in your account
  2. -you risk 1% / trade
  3. -r:r 1:1
  4. -you're over 100 trades
  5. -no spread
  6. -with a winning rate of:


-55% : profit: 100usd
-60% : profit: 200usd
-65% : profit: 300usd
-70% : profit: 400usd
-75% : profit: 500usd.


Now let's do the same with r:r 1:1.1 :

-55% : profit: 155usd
-60% : profit: 260usd
-65% : profit: 365usd
-70% : profit: 470usd
-.......

Calculate this with different account sizes and 1:1.2, 1:1.3 and so on....

I'm not saying that 1:2, 1:3, 1:10 can't be profitable. But honestly. Most of us are still loosing. Once back we made a 1:30 luckily. And since then we still daydreaming about depositing 500, putting 100 on 1:30, and than put the 3000 we made on 1:30 again so we have 90k. F*CK! NOT. even if we used proper bankroll management, and hit 1:30 every 10th time, loosing 9 in a row is something that not many can deal with. And we still ignored deviation what can easily mean we loose 50 in a row, and then win 5 in a row... Who can handle that? Is it possible to make the right decisions after loosing 50 in a row?

/I used to be profitable in online poker during high school, and I it can take more than 1.000.000 played hands to get to the means. (Get that flush 35% of the time, get your straight completed 32% of the time. And also not getting rivered more than it's mathematically acceptable.) ONE MILLION hands./

I know 1:30 is a rough example. But the same apply to 1:10 and winning 30%.
Deviation and psychology together must be the reason for so many loosing traders. At least in the beginning. We must learn self control, stick to our rules, and so on.
Something much easier with 1:1 and making 3 trades a day, then waiting for 1:2, 1:3 for days and loosing 6 out of 10.


//Also I wonder how many people are repeating themselves on these forums saying 1:3 is a must, they don't want to leave pips on the table and so on...
Are you guys making money consistently? For years? With a sample of say like 500-1000+ trades? So wft are you doing here? Searching for proper r:r ratios?
Or just daydreaming about making it big?//

Just my 2 cents..

  • #79
  • Aug 14, 2018 6:08pm Aug 14, 2018 6:08pm
Risk to reward 1:1 with win rate around 65% and non-cyclical strategy. It's really hard to find something that's not cyclical thou.
When you see it, BET big.
  • #80
  • Aug 15, 2018 4:57am Aug 15, 2018 4:57am
i think maybe it's not just risk:reward ratio is just matter , i think we need to learn how to manage trade how to move stop lose, may we can use 1:1 but by manage trade and know when we move to stop loss probably it's can work well.... what if we entered trade with 100 stop and 100 profit but then we managed that trade and moved stop to be 25 pip later, i guess if we won 2 trades 200 pips and lost 25 at one , that would be great, but again it's not perfect world ... and talking in forums is something but experiment is something else...a lot ideas great from theory view but in real world it's disaster results
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