1:3 risk to reward 1M/5M system

Hi,

Anybody have a idea of 1:3 risk to reward or more 1M or 5M system? if any then please share me.

Thanks.

I have a problem with the whole 1:3 or 1:2 or any R:R basically

if you are doing it with a stop of lets say 20:40 or 20:60 it is far more likely that noise hits your 20 stop so the probability of stop out is far greater.

you can only say you have 1:3 R:R if you KNEW in advance the volatility of the market and the momentum towards your t/p target.

as it stands you can cover your Risk to an extent if you are aware of volatility but your reward is X (unknown) unless you are using the sigma of the instrument as well in which then the 1:2 or 1:3 is meaningless as the sigma goes both ways up and down in respect to the reference point you are using.

Thanks Redlion for your view.
but my understanding is without RR you can not succeed in forex.

I used R:R in designing my system. While Redlion is right about the fact that your S/L will get hit more often, it's not necessicarily the case that you can't find an edge because of this.

I will say that the 1:3 R/R seems to be very, very difficult to achieve. I've not been able to find a system that goes 3x Risk "enough" to make it workable. Currently, I use a 1:2 target, and I found that you can work that profitably. Furthermore, the win ratio for a successful 1:3 system is probably going to probably over around 29% to 31%. This makes losing streaks a real issue because when you take statistical probabilities into account, you need to build your money management so that it will be able to take 30 losses in a row. Furthermore, between the time you start and the time you hit that once-in-a-lifetime 30-loss streak, you'll have everything LESS than 30 losses. So you'll have a 25-loss at some point, you'll have a 20-loss a 23-loss,etc. That is all built within the system and is considered "normal" if your win ratio is 30%. Most people can't withstand that type of "normal".

Remember though, you only need price to go in your direction "enough" to make a profit. Specifically, if you're using an ECN account, you need only win about 35% of the time (33% is break even then add in a bit for the commission) on the M5 charts to break even on a 1:2 system.

I can't really tell you how my system works completely, because I use discretionary trading now on entries. Exits are systematic though. I use a trade manager. I look at how things are moving and determine if I'm going to use a 10-pip, and 11-pip, or a 12-pip stop. Then I tell the trade manager to kick in a trailing stop at 2R. I don't want a "winner" to turn into a "loser" so I have the trade manager to initially jump the stop to B/E once price hits 1R.

Entries are the tricky part for me. I've simply studied the pairs I trade for a long, long period of time and simply put on a trade in the direction of the newest candle if I believe that things look like there's enough momentum to carry the price 2R. If I'm right only 40% of the time the system is rather profitable. On the flip side, a 40% winning system will eventually hit a 21-loss streak. I've found that it's very common to take 12 losses or 13 losses in a row if not every month, then at least every other month. So you very much get the impression that you're losing all the time, even though this isn't true. You gotta really trust your system to average things out by the end of the month to trade R/R because anything over 1:1 will always have less than a 50% win rate.

I'm sure you could pick a pair (preferably one with a low cost-per trade) and get a sense for how things are moving well enough that you could win just 40% of the time.

Thank you FXAssassin for your view.

I understand what you are saying especially the part that at some point some outliers can blow up a system but here is what I take issue with this.

the average range for the fiber is 120 (over 3304 trading days) the standard deviation is 60 pips. noise is more likely to take out a stop, if set that way

the expected reward is always X
while your Var can be adjusted range of the pair or noise needs to be accounted for.

1:2 is seems arbitrary to me. but please explain further maybe i lack the imagination.

let me illustrate my point in more detail


-----------------tp 40 or 60

---------- price

------------------SL 20 or 30

it is far more likely to get stopped out than to be filled in your t/p

risk reward is 1:2

let say your system takes volatility into account and you work it this way


---------------------------------------+60 pip additional = 60+sd

----------------------------------------line on chart at 60


range 120


-------------------------------------------line on chart at -60

------------------------------------------- -60pips addtional = -60-sd


now you are looking for entries as the market goes down to achieve your 1:2 or 1:3 R:R . Now a bias in analysis happens as you are looking to buy when the market is selling and shorting when the market is buying.

I think the whole low risk, high reward thing is one of the reasons so many people fail. I don't know the exact maths, but the average losing streak you will have if you flip a coin 100 times is about 8 losses or something.

You will find info if you google it, for 1:3 or around a 25% chance of winning, your losing streaks are so huge that your risk can only be tiny and it's hard to tell you if don't have an edge or are just in a losing streak. Not to mention if you are like 95% of humans you will not make decisions as well whilst in said losing streak.

Find a 50/50 system, that way you will find out if you have an edge pretty quickly. Take the following concepts and roll with it, it's one way i become profitable:

Take a high and low (could be of a session or a day or a wave, whatever)

1.Is there are way i can predict which side (high/low) is slightly more likely to break so if i enter in the middle i get 1:1 R:R but win more than 50%

2. Is there a way i can enter slightly closer to one of the highs/lows and still have a 50% chance or higher of winning but have slightly higher than 1:1 R:R

When you find your edge the R:R will take care of itself

The answer to your question is two-fold:

#1) 20 Pips is Too Much - I look at the way the pair seems to be flowing and I pick either 10, 11, or 12 pips as my R-factor. So the max T/P level @ 2R is 24. When the R-level is 10, I'm only looking for a 20-point move.

People will then counter that this stop is too close and that you'll get pulled out of trades too early. I don't care about that, because....

#2) Trade Frequency - I trade the M5 charts and I'm rarely in a trade for more than 20 minutes. There are plenty of times when I'm stopped out at the very next candle. This isn't an issue because all that matters is the final wining ratio for the month. once I'm pulled out, I'm looking to go back in.

Sometimes, if I'm going short, the wick of the candle will whip up and take out my stop, but by the end of that 5-minute bar, the candle is hard-core down in the direction that I originally intended. If everything lines, up, I'll go back in on the same candle! Commission be damned. I'd say that MORE than 50% of the time when I do this, the price pushes down hard and my T/P is hit within 2 candles. Since my system average is 40% winners and this particular situation is 50% winners, it makes sense to go again even though the market temporarily stopped me out.

On the flip side, once I go in on a trade, I'm committed. Either it's stopping out, it's hitting 2R, or it is hitting break-even. These are all controlled by FXSynergy. The ONLY time I close out a trade early is if I put the trade on close to noon on Friday and then the market just puttered out an no movement is taking place. Whether the trade is in profit or not, I close everything out by 3:30 on Friday.

This commitment means that I can't really consider changing directions until the trade is closed. If I am running a 10-pip stop and am getting pulled out of trades a lot, then that gives me many opportunities to go the other way. Am I whipsawed a lot? Yes....but it doesn't really matter as long as the winning ratio is 40% at the end of the month. When things are really moving, I've seen the system take as many as 28 trades in a day with the day being defined as 1-hour before London open until the 12:05 eastern time when the noon candle closes.

This really brings up the major strength of methods which ebb and flow with the waves of the market on 5-minute charts.

High Trade Frequency.

People like to run around all the trading forums squeeking about the dangers of "overtrading" and whether they admit it or not, their definition of overtrading is flawed. They would all consider what I do to be overtrading simply because my method of trading takes on 2x or 3x as many trades in a day as the next highest frequency trader they know. GOTTA be overtrading, right?

Just ask yourself this though.....if your money management was the same, which of the following systems would you rather run?

System A)
Risk/Reward: 1|2
Win Ratio: 0.40
Trade Frequency: 300 trades p/year

System B)
Risk/Reward: 1|2
Win Ratio: 0.40
Trade Frequency: 300 trades p/month

I'm finding that MA crossovers as setups work really well on the 1 / 5 min charts during volatile trading conditions such as the London / NY sessions. As far as 1:3 RR - I don't like the idea of going for a strict RR each time, rather, I would prefer to take what the market gives me by having a set exit signal with some dynamic stops in place if the position is in a profit.

For instance, if position 10 pips in profit set to BE, if position at +20 lock in 10 pips, and then let it ride till you get an exit signal.

Simply put, I think any S/R, trendline, or MA based system can generate pips during these conditions with the right exits- it's just up to you to determine what method you like best.

GO LAKERS!

@FXAssassin...I would trade system B. Lol

i use 1.5:1 risk to reward. i use ATR to adjust position size to account for volatility.

1:3, sounds like you'll get stopped out a good amount of times.

I don't get that whole R:R discussion. It depends on the system. Period.

I've built a system that shows optimal profit in the long run when R:R is 1.3:1 and the win rate is 48%, and another one that shows optimal profit when R:R is 7:1 and win rate is 20%. The first one will lose money if I increase the R:R, the second one will lose money if I decrease the R:R.

You don't start making a system by calculating the R:R. This is just a calculation that you do for fun once you have tested the system and tweaked it in the most profitable way.

MicMic...are you saying that your winners are 1.3x the size of your losers or are you saying that your losers are actually 1.3x the size of your winners?

The reason I ask is because it's mathematically impossible for a system to be profitable in the long run if your average loss is larger than your average win AND you have a greater percentage of losses.

It's all about positive expectancy. Here's a simple formula for expectancy:

(AvgWinner x WinPercentage) - (AvgLoser x LosingPercentage)

If you're saying that you lose 52% of the time and each loser is 1.3x the size of your average winner, then you get:

(1 x .48) - (1.3 x .52) = -0.196 << This is a negative number which means the system is not profitable.

Use real dollars and real trades. If for every win you win $1.00 and for every loss you lose $1.30 over 100 trades with a 48% win rate, you'd get:

($1.00 x 48) - ($1.30 x 42) = -$19.60

Of course the winners are 1.3x losers. Reward goes first