2:1 trading system - page 2

Rodger Sen  
gumbay #:

Hi there,

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

Gert Jakobus Visser #:

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.

Trade safe.

Got it, Thanks for your opinion

Vytautas Paliokas  
Arpit T:
I have a trading system but it works when risk is 2 and then it gives reward of 1

It's a strange problem because even if system accuracy is high but I know that to grow account we must use minimum 1:2 trading system where risk is 1 and reward should be 2 or more 

So can you please suggest me what maths and probability or money management I can use so I can still be profit with that system where I risk 2 for reward of 1

it's all depends on your strategy. Most time my first SL is bigger than TP, but i most time close manually my position before market hits my SL.
Petr Baskakov  
It is better to trade scalping, open orders in plus and not open orders in minus. .use trailing stop and not stop loss
Lalit Kumar  
What if we hedge the position instead of stoploss?
Angelito Cartagena  
Bad risk reward ratio is not a good approach in trading, once those losing trades comes in your account will be in trouble, it may look good at certain point but once the market start to move against you in bunches, your doomed. Although a lot of traders adopt to this kind of approach, but I would not recommended it, I tested such approach many times in the past but I failed in the end the same happen to a lot of traders also, the best approach is to develop a method that used at least 1:1 or better RR. I know that creating a reliable and consistently profitable system does not just depends on RR its a whole lot more really, plus you have to take care of the emotional aspects also, its another thing that a trader must deal seriously.
Angelito Cartagena  
Lalit Kumar #:
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.

Rafael Grecco  

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:

[image removed by moderator]

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.

While your system's Risk:Reward ratio is atypical, profitability isn't out of reach. To succeed, you need an accuracy rate over 66.7% because for every two losses, you need at least four wins to break even. Consequently, trade selection becomes crucial; focus on those with high chances of success. Incorporate rigorous backtesting and careful market analysis to further improve the system's accuracy.

Risk management is crucial. Strictly adhere to risking only a small percentage of your account per trade to protect it from significant drawdowns. Diversify your trades to avoid concentration risk and consider using a trailing stop loss to potentially capture more profit when the market moves in your favor.

Lastly, explore ways to increase the reward while keeping risk constant. Analyze your exit strategy and see if there's room for improvement or extension of the profit target. 

Remember, it's not about Risk:Reward alone but the combination of it with the system's win rate and trade management.