New to Forex - risk to reward

B

BarryP

Junior member
Messages
12
Likes
0
Hi, I'm relatively new to Forex trading but reasonably up to speed with the various indicators, candlesticks, money management etc. Whats the concensus of opinion on risk to reward ratios. I've read that 3:1 is preferable. I had a relatively good week (385 pips - I think thats good?) making an average of 58 pips on winning trades and 30 on losing trades. 12 trades - 8 wins and 4 losses. I've read articles where a 1:1 risk reward is recommended - seems like flipping a coin to me. Psychologically, I find it hard to reject trades just on the lower risk to reward ratio. What do the more experienced traders do?

While I'm here - If you have an IG index spread betting account then you have access to Autochartist. Has anyone used this? If so comments please. I analysed 15 or so completed chart patterns and the majority of them reached their target - not scientific I know!
 
BarryP said:
Hi, I'm relatively new to Forex trading but reasonably up to speed with the various indicators, candlesticks, money management etc. Whats the concensus of opinion on risk to reward ratios. I've read that 3:1 is preferable. I had a relatively good week (385 pips - I think thats good?) making an average of 58 pips on winning trades and 30 on losing trades. 12 trades - 8 wins and 4 losses. I've read articles where a 1:1 risk reward is recommended - seems like flipping a coin to me. Psychologically, I find it hard to reject trades just on the lower risk to reward ratio. What do the more experienced traders do?

While I'm here - If you have an IG index spread betting account then you have access to Autochartist. Has anyone used this? If so comments please. I analysed 15 or so completed chart patterns and the majority of them reached their target - not scientific I know!
Click to expand...

If its not broke dont fix it. thats very good,why not join the live forex thread and call a few trades out. Id lone 385 pips this week
 
Lord Flasheart said:
If its not broke dont fix it. thats very good,why not join the live forex thread and call a few trades out. Id lone 385 pips this week
Click to expand...

Thanks for that. I intend to join the live thread. If I call my trades with stop loss, profit target, reasons for entry etc will I get feedback? I want to know if the trade was founded on any substance or whether I was shooting from the hip.
 
of course, I and others will try and answer any questions you have. whats to say you dont know more than us. Will you be calling live trades or demo.
 
Lord Flasheart said:
of course, I and others will try and answer any questions you have. whats to say you dont know more than us. Will you be calling live trades or demo.
Click to expand...

Live trades only. Sorry, being lazy now and not knowing my way around the forums - which would be the best forum/thread to use to post trades?
 
BarryP said:
Live trades only. Sorry, being lazy now and not knowing my way around the forums - which would be the best forum/thread to use to post trades?
Click to expand...

Barry. Use this thread,for what its worth Ill give you my opinion.you can also pm me
 
Waiting to see if the price will hold below 12365
Using 15min chart at moment
Resistance at 12398ish my stop is just above that @12410
Any thoughts?
 
BarryP said:
Waiting to see if the price will hold below 12365
Using 15min chart at moment
Resistance at 12398ish my stop is just above that @12410
Any thoughts?
Click to expand...

stops seems to be in the right place.Personally id have taken 1/2 off by now.
 
Stupid trade! Small loss of 12 pips
Broke my rule of only trading in the direction of the daily trend.
 
Lord Flasheart said:
there are many ways to skina cat.I find its more important what I dont lose so i generally take some off after a while and move my stop down
Click to expand...

Had to go out so tightened the stop, added a trailing stop and left it. Price crept up and hit my stop for a gain of 72 pips. I've read something about scaling down positions, I'll dig it out and run it past you.

Any comments on strategies would be most welcome.
 
BarryP said:
Hi, I'm relatively new to Forex trading but reasonably up to speed with the various indicators, candlesticks, money management etc. Whats the concensus of opinion on risk to reward ratios. I've read that 3:1 is preferable. I had a relatively good week (385 pips - I think thats good?) making an average of 58 pips on winning trades and 30 on losing trades. 12 trades - 8 wins and 4 losses. I've read articles where a 1:1 risk reward is recommended - seems like flipping a coin to me. Psychologically, I find it hard to reject trades just on the lower risk to reward ratio. What do the more experienced traders do?
Click to expand...

Im not experienced (still demoing) but when I read about risk:reward, why isnt the probability of the trade being sucessful included? For example, say you open a trade with risk reward of 1:1 and the trade has 50% chance of success then the expected value is:

-0.5*1 + 0.5*1 = 0 tossing a coin like you said. If the trade has 70% chance of success then EV = -0.3*1 + 0.7*1 = 0.4.

So having 1:3 can be good or bad depending on the probability of success. If trade has 10% chance of success then
EV = -0.9*1 + 0.1*3 = -0.6
 
Scotty2Cues said:
Im not experienced (still demoing) but when I read about risk:reward, why isnt the probability of the trade being sucessful included? For example, say you open a trade with risk reward of 1:1 and the trade has 50% chance of success then the expected value is:

-0.5*1 + 0.5*1 = 0 tossing a coin like you said. If the trade has 70% chance of success then EV = -0.3*1 + 0.7*1 = 0.4.

So having 1:3 can be good or bad depending on the probability of success. If trade has 10% chance of success then
EV = -0.9*1 + 0.1*3 = -0.6
Click to expand...

You are absolutely right. I suppose the only way to evaluate your system is over time and incorporate the probability of a winning trade into your calculations (as long as you apply your strategy for each trade). Van Tharp calls this Expectancy and this is more important than how many wins to losses you have. Its why many inexperienced traders make some money only to give it back fairly quickly. I take too many discretionary trades and I need to sort that out quickly!
 
All true but it depends on how you view things.If you read books they tell you you are always 50% chance of winning. If i believed that I didnt have an edge i wouldnt bother trdaing. Some books state that patterns have a 60% chance. It wou;d all depend on targets etc. All I know is that having a r/r of over 2/1 is crucial. Set up a simple MA system on a 1 min chart and trade wuth say a 7 pt stop with targets of 7,14 ,21,28, 35 etc and see what happens.There will be large fluctuations but overall the bigger r/r will have better results
 
Lord Flasheart said:
All true but it depends on how you view things.If you read books they tell you you are always 50% chance of winning. If i believed that I didnt have an edge i wouldnt bother trdaing. Some books state that patterns have a 60% chance. It wou;d all depend on targets etc. All I know is that having a r/r of over 2/1 is crucial. Set up a simple MA system on a 1 min chart and trade wuth say a 7 pt stop with targets of 7,14 ,21,28, 35 etc and see what happens.There will be large fluctuations but overall the bigger r/r will have better results
Click to expand...

That's all true. If you have traded your 'MA on a 1 min chart' system for a number of trades you can begin to calculate the % win rate. You then add in your profit/loss expressed as amount risked/gained per trade and you have the expectancy for your system. You can easily have systems that lose 6 times out of 10 but still have a positive expectancy.

Anyway I'm off on holiday for a week!
 
It's tricky. It's a topic I hate discussing because on the face of it, if you have a system that is 50% successful then a reward:risk of 3:1 clearly means you will make money over time (applying suitable MM). Experience/reality has been somewhat different. It doesn't feel like a biased coin-flip... you learn to manage a trade which affects the probabilities of profit and you learn to filter out "set ups"/signals that experience tells you are bad trades. This can only come from experience and no book/mentor/seminar/web article can help here.

I've found that it's possible to have many "failed" trades whereby taking some profit and then being stopped out without losing anything can build an account while you are waiting to jump on the occasional (20% probability?) big mover; maybe 60% giving you 1:1, 20% giving you a trade that would make no money but not move enough before stopping you out and maybe 20% being outright failures. So this would theoretically produce a 60% successful system if you didn't manage the trade carefully but by managing a trade, you can turn half of the losers into vaguely profitable trades (you'd rather take 25 pips than lose 50) which help to grow your account rather than ruin it. The downside is that if you routinely (robotically? mechanically?) scale out without having a feel for the price action, then you can negatively affect your overall profitability so it is something that works with experience.

There's no point getting into a discussion. Experiment with this on a demo/small account and see how you get on.
 
Last edited:
You must log in or register to reply here.

Similar threads

T
Risk Reward Myth
9 10 11
Replies
210
Views
93K
Stockness Monster
S
D
Risk Reward Ratio
2
Replies
22
Views
6K
Mr. Charts
Mr. Charts
P
Risk Reward and Trading Stategy
Replies
0
Views
2K
PipMuncher
P
D
Risk Reward in Trading strategies
2
Replies
32
Views
10K
growltiger
G
Tim Parker
  • Article
Equities Money Management Calculating Risk and Reward
Replies
0
Views
5K
T2W Bot
T2W Bot
Top