Money management system #5 (Winning risk : reward ratio)
Submitted by Edward Revy on August 25, 2009 - 02:51.
Risk/reward ratio is one the most influential parameters of any Forex system.
A good risk/reward ratio is able to make an unprofitable system profitable, while poor risk/reward ratio can turn a winning setup into a losing strategy.
What is risk/reward ratio?
Risk - simply referred to the amount of assets being put at risk. In Forex it is the distance of our Stop loss level (in pips) multiplied by the number of lots traded. E.g. a stop loss at 50 pips with 2 lots traded would give us a total risk of 100 pips.
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hello
what u said about risk/reward ratio it just good on the papper but most time the market has too many highs and lows so get ur SL then get ur TP!!!
mahmoud
good article, i think the important point is that a great deal of traders are lookin for the holy grail and go from system to system in order to 100% winning trades. the point you make shows that you can have a system that may only achieve 50% winners but if your winners (including expenses like spreads etc) in pips are greater than your losers then you potentially have a good system.
Thank you for your graph and chart.
Thank you for showing the risk reward ratio based on the graph or chart. I think I would give it a try. For me, it shows how confident or comfortable are you when you start to make an entry for a buy or a sell position.
For a long term playing forex,
For example:
win small piece, loss big piece, e.g. SL40, TP20.
Developing a lack of confident in future.
In which next time you may consider, SL100, TP10.
Since TP10 easy to achieve than the TP20.
or
win big piece, loss small piece, e.g. SL20, TP40.
Developing a full of confident in future.
In which next time you may consider, SL10, TP100.
Since TP100 you know how to achieve.
This is how I see.
Regards,
Steven
Thank you!
Good point as well. There should be a balance.
On the other hand, if you win only 25% of the time, your system is probably not the most effective one; unless, of course, your risk:reward ratio averages at 1:10 (seldom proportion to illustrate the main point).
Regards,
Edward
You also need to take into account the statistics of the matter. For example, a 25pip stop and a 75pip profit is 3:1 as you said above. But it is no good unless you are wining MORE than 25% of the time. Exactly 25% of the time would be breaking even and less than would be making losses. Simply adjusting the ratio may not help either as it was pointed out before that a closer mark (whether stop or profit) would be hit more often that one set further away.
Additonal reference here at:
Forex Risk-Reward Folly
Great visuals of risk and reward. The best I have seen on risk and reward.
Great way to teach this important fact. It is something you can imprint on your mind to act upon when these setups avail themselves with low risk. Thank you,
thank you, thank you!!!
That's true. The best forex system is "Risk and Reward Ratio". Without Risk and Reward Ratio you just make your broker rich.
Thank you, that's a good point. I'm not saying it is easy. I'm giving an advice to follow in order to maximize chances for successful Forex trading.
Entering somewhere and setting SL to 20 and TP to 80 won't work, you are right about that.
The most challenging part is to get into a position at the best possible level and set the smallest stop possible. In order to do that with maximum precision one has to know a lot about markets.
Even when your trading sheets start looking like this: L L L L L W L L W L L L W, you can easily be a happy and profitable trader, because not the number, but the size of the Wins and Losses matter.
Best regards,
Edward
Sorry to disappoint you but it just isn't that easy...
If you set your SL to 20p and TP to 80p you are much more likely to hit your SL
before hitting your TP even though your system would give correct signals 50% of the time.
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