2:1 trading system - page 2
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Although your question directly relates to a (mechanical) trading system, and its potential for profitability or otherwise, there are several aspects to your initial written query which suggests considerable lack of understanding across multiple aspects of consideration. And as such, it is hoped that the following would guide you in a more favourable direction.
Firstly, there is no universally applicable rule which dictates that one must apply a trading system in which risk to reward is 1:2. In fact there are many professionals (particularly in stocks and forex trading) who make use of trading techniques (note I avoided the word ‘system’, thus implying it has been developed over time) that have the potential of costing them 2x or more (on a losing side) of what they would gain if the trade goes in their favour. And many of them are very possible. You see, they are able to trade that way because they understand (amongst a few other considerations) risk management, money management, and the relationship between time and distance.
Now, in considering probabilities alone, one has greater odds of a trade reaching a shorter distance target, than one reaching a longer distance target; that is because certainty exists closer to now: and not in the future! You see, if I asked you what you’d be doing in the next five minutes, or thirty minutes, or even one hour from now, you are likely to give me an answer with a high degree of certainly. But if I asked you what you would be doing at 1:00pm four to six days from now, you would not be able to answer with a high degree of certainty.
So, with the aforementioned in mind, it is important to note that professionals only act on what they know, and what is highly probable. And probability is highest when the distance between a current state and a desired state is management. That is why many professionals would commit large amounts of capital when they expect to be in a trade for a short period of time, and smaller amounts when they expect to be in a trade for longer than they can afford to risk.
Professionals seek accuracy, whilst novices seek assurance and security. Many professionals will take trades with 1:1, 2:1, and even 3:1 (whatever the market provides that their skills can capitalize upon). Some novices on the other hand are seeking trades of 1:4 or higher. But trades of 1:4 come a lot fewer than those of 1:1. A trader should only solely dwell on high reward to risk ratios if one’s accuracy is less than 50%.
I suspect you’re a Johnny come lately to forex trading. And if such is true, you need focus less on trading profits at this point in time, and more on developing as a trader. I recommend you read the trading blog post below as it will give you a clearer idea of your current stage of trader development, and how to grow from there. Best of luck.
Golden advice, Thanks
Hi, if your risk/reward is 2:1, you'll need a success rate of 70% to BE. I don't think there are many professional traders achieving these results though.
If I may, rather develop a strategy with a 1:2 or 1:3 risk/reward and learn to let winners run. Don't get stuck with fixed TP's, because different market conditions bring different opportunities to profit. the same goes for your SL, sometimes you would have to decrease your lot size to be able to survive volatile market conditions without compromising draw down. Stick with 2 to 3 trades per day and stop trading after 2 consecutive losers.
Got it, Thanks for your opinion
I have a trading system but it works when risk is 2 and then it gives reward of 1
What if we hedge the position instead of stoploss?
If maybe good to think that its okay to hedge instead of putting a stoploss, but the problem with this approach is how to cut the losing trade, because there is no guarantee that the market will reverse back to the starting point, while this approach works at certain point of the market but it will not work all the time, once the market continue to move against your position, your account will get wiped out. Its better to cut your loses early than wiped out the whole account later. A trader must understand that in trading you cant be right all the time, you must learn to admit that you are wrong on you presumption about the particular move. Most traders are stubborn and insist to be a winner all the time, they try some risky approaches thinking that they can recover their loses in such way, only to realize later that all the money in their account is gone.
R:R alone means nothing. If 2:1 works for your strategy, you are good to go.
The problem here seems that your strategy is not good enough for this R:R
For example: I developed a scalping trading system that uses a R:R of 6:1 (if my trade goes wrong, I lose 6 times more than I win on average). Below is yesterday's results:
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See? On the list above, my strategy could be wrong 4 times and I would still be positive. As long as you have a good enough system for a specific R:R, any R:R could work. There isn't a fixed rule.