A proper trading system with RRR and Winning rates
Page 1 of 10 12345 ... LastLast
Results 1 to 10 of 93

Thread: A proper trading system with RRR and Winning rates

  1. #1
    Trader ara's Avatar
    Join Date
    Dec 2013
    Posts
    1,834
    Thumbs Up
    Received: 106
    Given: 184

    A proper trading system with RRR and Winning rates

    I want to share my little knowledge for beginners, not for expert traders. But in reality many cases of traders who have one or two years of experience in forex but can't build a proper trading system (has some components).

    I know and understand there are still a lot of Forex traders who are difficult to succeed but most of them already have a trading system. We need a profitable trading system. We can create our own or we can apply trading systems owned by other people or other traders. Yes, a trading system can be used to make a profit in the market. But in fact, even though we have implemented a trading system, how come we still can't generate consistent profit in this business? YES many peoples say that the reason is because of undisciplined and emotion. That is a CLASSIC answer. But still we have problem with that issue.

    When I noticed, many traders who despite already using a trading system, but still not paying attention to this 2 component :

    1. RISK/REWARD RATIO (RRR) or SL/TP RATIO

    Once we have a trading system, we also have to have the right risk management. Okay... That's true.., but what kind of risk management that is? How about reward? Of course we have to have both management (risk and reward management), not only about risk management. We usually call it as RISK REWARD RATIO. Many traders have risk management, but no have reward management. He determines what percentage of risk per trade by using Stop Loss or cut loss manually, but does not specify what percent or pips Target Profit. So there is the doubt to let floating profit run, many traders are in a hurry to close the position of profit, but let floating loss too long until finally got stressed.

    2. WINNING RATES (WL)

    When I noticed, many traders who use a trading system with risk reward ratio, of course, risk reward ratio is important, even a very crucial factor in forex trading. But unfortunately, many traders who do not also take into account the relationship between risk/reward ratio with winning rates.

    So many traders think that a profitable trading system must have 1: 2 Risk Reward ratio or more. Not at all, all Risk Reward ratio comparisons are profitable depending on the Winning Rates. 1:10 Risk Reward ratio or 10:1 Risk Reward Ratio both are profitable depend on the winning rates.

    And vice versa, many traders think that a profitable trading system must have 60% or more winning rates. Not at all, all percentage of winning rates are profitable depending on the Risk/Reward Ratio. 90% winning rates or 10% winning rates both are profitable depend on the risk reward ratio.

    I will explain this further, I would like to keep this thread alive. Please be wise in commenting and not out of the topic. I hope we can discuss and make this thread as a case study.

    Not allowed!

  2. #2
    Trader ara's Avatar
    Join Date
    Dec 2013
    Posts
    1,834
    Thumbs Up
    Received: 106
    Given: 184
    1. About Risk Reward Ratio

    What is mean by Risk Reward Ratio? I take the definition from investopedia : Many investors use a risk/reward ratio to compare the expected returns of an investment to the amount of risk undertaken to capture these returns. This ratio is calculated mathematically by dividing the amount the trader stands to lose if the price moves in the unexpected direction (the risk) by the amount of profit the trader expects to have made when the position is closed (the reward).

    Well, there are three possibilities in the calculation of Risk Reward Ratio in forex trading, we generally implement in Stop Loss and Take Profit :

    1. Risk = Reward
    This mean that Risk amount equal to reward amount, or stop loss point equal to take profit point.
    We usually call it as 1:1 RR ratio.

    Example:
    We set a 1: 1 Risk Reward Ratio.
    Stop Loss: 50 pips
    Take Profit: 50 pips
    2018-05-23_084936.jpg
    In the chart above I tried to enter Sell 0.01 lot size, with 50 stop loss, and 50 take profit.
    If the price hits the take profit point, then I will gain: $ 0.1 * 50 pips = $ 5
    If the price hits the stop loss point, then I will lose: $ 0.1 * 50 pips = $ 5

    2. Risk > Reward
    This mean that Risk amount higher than reward amount, or stop loss point higher than take profit point.
    We usually set 2:1 RR ratio, 3:1 RR ratio. 4:1 RR ratio. 5:1 RR ratio, and so on...
    Or we can use another ratio like : 5:2 RR ratio, 7:3 RR ratio, 4:3 RR ratio, 3:2 RR ratio, etc... (but this ratio is rarely used by traders)

    Example 1:
    We set a 2:1 Risk Reward Ratio.
    Stop Loss: 50 pips
    Take Profit: 25 pips
    2018-05-23_090108.jpg
    In the chart above I tried to enter Sell 0.01 lot size, with 50 stop loss, and 25 take profit.
    If the price hits the take profit point, then I will gain: $ 0.1 * 25 pips = $ 2.5
    If the price hits the stop loss point, then I will lose: $ 0.1 * 50 pips = $ 5

    Example 2:
    We set a 5:3 Risk Reward Ratio.
    Stop Loss: 50 pips
    Take Profit: 30 pips
    2018-05-23_090653.jpg
    In the chart above I tried to enter Sell 0.01 lot size, with 50 stop loss, and 30 take profit.
    If the price hits the take profit point, then I will gain: $ 0.1 * 30 pips = $ 3
    If the price hits the stop loss point, then I will lose: $ 0.1 * 50 pips = $ 5

    3. Risk < Reward
    The opposite of Risk > Reward
    This mean that Risk amount lower than reward amount, or stop loss point lower than take profit point.
    We usually set 1:2 RR ratio, 1:3 RR ratio. 1:4 RR ratio. 1:5 RR ratio, and so on...
    Or we can use another ratio like : 2:5 RR ratio, 3:7 RR ratio, 3:4 RR ratio, 2:3 RR ratio, etc... (but this ratio is rarely used by traders)

    Example 1:
    We set a 1:2 Risk Reward Ratio.
    Stop Loss: 25 pips
    Take Profit: 50 pips
    2018-05-23_091126.jpg
    In the chart above I tried to enter Sell 0.01 lot size, with 25 stop loss, and 50 take profit.
    If the price hits the take profit point, then I will gain: $ 0.1 * 50 pips = $ 5
    If the price hits the stop loss point, then I will lose: $ 0.1 * 25 pips = $ 2.5

    Example 2:
    We set a 3:5 Risk Reward Ratio.
    Stop Loss: 30 pips
    Take Profit: 50 pips
    2018-05-23_091254.jpg
    In the chart above I tried to enter Sell 0.01 lot size, with 30 stop loss, and 50 take profit.
    If the price hits the take profit point, then I will gain: $ 0.1 * 50 pips = $ 5
    If the price hits the stop loss point, then I will lose: $ 0.1 * 30 pips = $ 3

    Oke, this is a short explanation from me about Risk:Reward Ratio in forex trading, if I find a new case related to Risk:Reward Ratio, then I will add it later.

    Not allowed!
    Last edited by ara; 05-23-2018 at 05:17 AM. Reason: edit some words

  3. #3
    Trader ara's Avatar
    Join Date
    Dec 2013
    Posts
    1,834
    Thumbs Up
    Received: 106
    Given: 184
    2. About Winning Rate

    Broadly speaking, winning rate is how much winning from our trading system as a whole,
    For example: We get 60 win trades from 100 trades total. It mean that winning rate of our system equal to 60%. no matter how much pips is our "Take Profit" and "Stop Loss". even if we only get profit 1 pips, just if we get profit, then it is called WIN. If we get loss even though only 1 pips, then it is called LOSS.

    * This is a little explanation about winning rate based on my languages. If there is a correction, please be written.

    Not allowed!
    Last edited by ara; 06-04-2018 at 06:28 AM. Reason: edit some words

  4. #4
    Trader ara's Avatar
    Join Date
    Dec 2013
    Posts
    1,834
    Thumbs Up
    Received: 106
    Given: 184
    Relationship Between Risk Reward Ratio and Winning Rate In A Trading System

    In general, there is a link between winning rate and risk reward ratio, and one will affect the other. Many traders say, 1:2, 1:3 or even 1:4 risk reward is a good risk reward, because we can get profit even though we have a lot of loss. For example with 1:2 risk reward, SL 50 pips, TP 100 pips. mathematically, from 10 trades, although only 4 trades are hit TP or in other words we only have a winning rate of 40%, we still profit accumulated.

    The calculation is :
    4 x TP = 4 x 100 = 400
    6 x SL = 6 x 50 = 300

    Yes we still profit 100 pips. But that does not always work, all back to what our trading system looks like.

    There is a relationship between risk reward with winning rate, where if the more higher is our reward compared to risk, then at the same time our winning rate will usually decrease and vice versa. It depends on the character of our trading system. So as a trader, our main task is to find the best risk reward that can provide optimal winning rate, and must be in accordance with our psychological conditions so that the goal to suppress the emotional factors can be achieved.

    I take my example of my own trading system that I used :
    In general, with my current trading system, I use a 1:2 risk reward ratio. The reason, because with this risk reward that I can have a winning rate average of 45%, mathematically, though only 45% but in total I still got profit, I take illustration of 100 orders with TP 100 pips and SL 50 pips:

    45 x 100 = 4500 pips
    55 (loss) x 50 = 2750 pips
    net still get 1750 pips.

    If I use 1:1 risk reward then winning rate will be better, about 50%, but if it is SL 50 pips TP 50 pips, what I get?
    50 x 50 = 2500 pips
    50 (loss) x 50 = 2500 pips

    break even, I get nothing. So I have to change the trading system because 1:1 RR ratio is not suitable for my current trading strategy.

    How if I raise the reward compared to risk?
    Okay, I will give an example, I've a trading journal as my tester for trading with very high Reward Vs Low Risk, yes I've set 1:7 Risk Reward Ratio.
    You can check here :
    http://forum.roboforex.com/threads/2...ading-Strategy

    I set 15 Stop Loss and 105 Take Profit ( 1:7 Risk Reward Ratio), I just use break out strategy. We can see on my trading history on my trading journal above, I got many loss trades, please check this image :

    2018-06-01_095211.jpg

    You can see, I got 11 loss trades in total, and only 2 winning trades in total. But the result is 0.93 profit in total.

    How if I reduce the reward compared to risk?
    Is there a trader who takes low rewards, and high risk in comparison ratio? Yes there are. They are scalpers, logically, it is impossible for a trader to set 5 pips profit and 5 pips stop loss. Or 3 pips stop loss. cmiiw. although in fact I've found a scalper who closes the position of loss trades manually when his analysis is wrong. He closed the loss trades between 1 pips - 3 pips (floating spread broker). But in general the scalper set the stop loss higher than take profit.

    And back to the law : "the higher reward than the risk, the lower the winning rate". That's why scalper has high winning rate. But what about the results that will be obtained?

    Example: If he set 5 pips take profit, and 15 pips stop loss (1: 3 risk reward ratio), then the winning rate will be high, maybe between 60% - 90% depending on the quality of his trading strategy.

    Conclusion :
    Many traders say that a trading strategy with > 50% winning rate are profitable. That is not true, because it depends on the Risk Reward Ratio.
    Many traders feel proud when they have a trading strategy with 80% winning rate or higher, while they don't mention what risk:reward ratio which they set. Having 80% winning rate still bad if they set 5:1 risk reward ratio (as an example)
    Many traders judge that getting loss trades is bad, That is not true. Because again depending on the risk-reward ratio that we set. Having 30% winning rate is profitable if we set a 1: 5 risk reward ratio.

    I made this thread with this topic because I found a member who saw my history of my trading journal and said that I have to learn a lot more to be profitable in forex trading. In other words, I am a bad trader. Yes, like what I said before, in the trading journal I have 11 loss trades total, and only 2 win trades. But I set 1: 7 risk reward ratio, that's why winning rate are so low. If I reverse the rule to 7: 1 risk reward ratio, then maybe I get 11 winning rate and only get 2 loss trades.

    So, don't separate WINNING RATE and RISK REWARD RATIO.

    Not allowed!
    Last edited by ara; 06-04-2018 at 06:30 AM. Reason: correcting some words

  5. #5
    Trader ara's Avatar
    Join Date
    Dec 2013
    Posts
    1,834
    Thumbs Up
    Received: 106
    Given: 184
    How important is Stop loss?

    There is one important thing, namely stop loss, for me stop loss is mandatory if we want to survive and succeed in this business. Imagine if we do not use stop loss? Stop loss is like a brake in a drive, no matter how much we drive a car, if there is no a brake, the risk for accidents and loss of cars and our lives will be even greater
    So in my opinion, stop loss is a must for a trader, stop loss is our risk management. So whatever your trading system, make sure there is a stop loss in it.

    Some comments from newbies:

    I never use stop loss, but can get profit
    Okay, once you get bad luck, all your money will be swept away

    I have big equity, one trade can hold 2000 pips floating loss
    Just look at the history of the market especially for CHF, there are big movement in just a second, imagine if those things happen again and move against our trade position without stop loss even though our equity can hold 2000 pips floating loss?

    Here I am talking about stop loss as part of risk management, I don't care if you set stop loss point automatically through the settings provided by your trading platform, or you cut the loss manually, or even you use script and robot to apply stop loss. That is not a problem for me, because in essence is you have to apply stop loss no matter what way do you choose in implementing it.

    Another comments
    I am a scalper, don't need stop loss, I can cut loss manually
    Yes you can, that is no problem as far as you set the stop loss level based on your risk management, but remember, cutting losses manually is not suitable for a newbie, especially if you have a bad psychological condition, because you will move your stop loss point out of your trading rules in terms of risk management. Also not suitable for scalping, as many cases of unexpected market movements in a short period of time especially when there are news releases of the fundamentals.

    I do scalping and I never trade when there are fundamental news
    Sudden market movements not only happen when there is fundamental news.

    I only have a small amount of deposit, I will risk all my deposit money
    That's not a serious problem, yes you can do that, You can divide your money to several times of deposit in accordance with your risk management in forex trading. It's up to you, just follow your style in managing trading risk. Whatever the way you are used. I will explain more about this issue on my next post.


    I think it's important to discuss stop loss and incorporate it into our trading system. If we can manage the risk then the profit will come by itself really

    Not allowed!

  6. #6
    Trader ara's Avatar
    Join Date
    Dec 2013
    Posts
    1,834
    Thumbs Up
    Received: 106
    Given: 184
    Style of Risk Management

    Have you read a thread from a member here who has a crazy idea? The link is here :
    http://forum.roboforex.com/threads/1...m-1-to-1000000

    He said that he has a crazy idea, 5 years of very aggressive trade to make $1000000 from only $1.
    Is that possible? Nothing is impossible. But unfortunately he said that "There are no rules, just aggressive trading without money management observation."
    That is why I think that is almost impossible. But if he have a good rules and money management, I think he can make that possible.
    I don't know sure because I didn't ever tried this crazy idea.

    If we tried to understand his idea, he will tried to make $1 of deposit, if he lose that amount, then he will make $1 of deposit again, and if he lose his deposit again, then he will make another $ 1 deposit again, so on and on.

    That means, at first he has a good rule in risk management. Yes, he set $1 as a risk. For example, he has $ 100 cash, so that means he has 100 opportunities to trade with $1 per deposit. Logically, he can deposit all of his $ 100 cash at once, and then he sets $ 1 stop loss per trades. It's the same. right?
    Yes of course, that's why I say that he has a good risk management at the beginning. But then he didn't have a risk management whenever he can get profit from his $1, so it was be very hard to gain $1000000 from only by $1 of deposit by using his idea. If he consistent for his risk management like at the beginning, I think he can make his idea become possible.

    Just from that case, we can take a conclusion that we can applied our risk management by 2 ways :
    1. We set a stop loss per trade
    Suppose we have $1000, we want to risking $20 per trades, then as usual, we make a deposit all of our money ($1000), then we can set our stop loss as $20 per trade.

    2. We set the amount of deposit money
    Suppose we have $1000, we want to risking $20 per trades, then we can set our deposit as $20 per deposit, and we can save the rest of our money for next deposits.

    Just choose whatever the way of risk management according to your style.

    Not allowed!

  7. #7
    Trader ara's Avatar
    Join Date
    Dec 2013
    Posts
    1,834
    Thumbs Up
    Received: 106
    Given: 184
    Change Your Mindset About Winning Rate and Risk Reward Ratio

    Winning rate actually plays a very big role. The greater the winning rate, the more secure the condition of your trading account.
    How about risk reward ratio? Is the greater the reward ratio compared to risk = the better and more profitable? Unfortunately the answer is "No". It depends on the winning rate of your trading system, because risk reward ratio and winning rates can not be separated.

    As I've discussed in the previous post, there is always a law:
    the bigger the winning rate, usually the smaller the reward
    the bigger the reward, usually the smaller the winning rate


    Have you ever met a trader who often get loss trades but he always stay cool? Are you surprised by his attitude? Are you sure that he is a loser?
    You should understand that a low winning rate does not mean he is not profitable. Okay, maybe you never find a trader who set 1:20 or 1:50 Risk Reward Ratio, but that's really there, he always gets loss trades, we find a lot of loss trades in his trading history but only find one or two win trade. But in total he gets the profit accumulated in a certain period.

    Not allowed!

  8. #8
    Trader ara's Avatar
    Join Date
    Dec 2013
    Posts
    1,834
    Thumbs Up
    Received: 106
    Given: 184
    A winner, a loser, a profitable trader, and a unprofitable trader

    A winner
    Who is the winner of forex trading? Of course a winner is he/she who is able to gain profit in forex trading.
    But wait a minute ..., Here I discuss about winners related to winning rates. Logically, the winners are those who have more than 50% winning rates, right? Because forex is all about probability. That's why the winner is those who have more than 50% winning rates.

    For example : I have trades 100 times in the last 3 months, I can called as the winner (in three months) if I've 51 win trades or more, and 49 loss trades or less.

    A Loser
    Conversely, a loser is those who have winning rates less than 50%.
    For example : I have trades 100 times in the last 3 months, I can called as the loser (in three months) if I've 51 loss trades or more, and 49 win trades or less.

    A profitable trader
    A profitable trader is he who get profits greater than loss accumulated. No matter you are the winner or loser, because the important thing is that you have a bigger profits than loss accumulated. The winner is not means profitable, because he/she may have 7 win trades, and 3 loss trades, but he/she implements a 3: 1 risk reward ratio. In this case he/she is the winner but unprofitable trader. Conversely, a loser does not mean unprofitable trader. We can be as a profitable even though we have dozens or hundreds loss trades and only have 1 trade. It depend on our risk reward ratio.

    A unprofitable trader
    A profitable trader is he who get profits smaller than loss accumulated. You can understand this by reversing the condition of the explanation about the profitable trader above.

    Not allowed!

  9. #9
    Trader ara's Avatar
    Join Date
    Dec 2013
    Posts
    1,834
    Thumbs Up
    Received: 106
    Given: 184
    Risk reward ratio according to our psychological condition

    Actually, if we look for trading system, the important thing is winning rate and risk reward safely to our psychological and emotional side, because if psychological and emotion already stable, also trading will usually be consistent. So actually, make our trading consistent with the help of risk reward ratio and winning rate in accordance with our emotional, sometimes even actually our system already powerful, but just because we didn't ever calculate and backtest the winning rate of our system with some combination of risk reward ratio, or wrong in choosing a risk reward ratio then our trading system becomes bad. if we already have a trading system, so stay looking for a powerful risk reward ratio with winning rate that is able to make us get profit consistently. So a trading system is always flexible in percentage winning rate because it depends on risk reward ratio.

    Example: there are trader who get a lot of losses in a row, but he stay cool because he knows that the end result will be accumulated profit, he always get the loss in a row in 3 months, but all his loss was covered only in one win trade, why ? Because he uses 1:50 risk reward ratio.

    Are you going to stay cool when you always get loss in 3 months without win though? Yes of course you will feel psychologically panicked if you don't have a good trading system with a combination of risk reward ratio.
    But I'm sure you will get panicked when you get loss always in 3 months with no a single win though, even though you have a good trading system with 1:50 risk reward ratio, because you are not familiar to using this kind of trading system (1:50 risk reward ratio) so it is very influential on your psychological condition.

    Not allowed!

  10. #10
    Trader ara's Avatar
    Join Date
    Dec 2013
    Posts
    1,834
    Thumbs Up
    Received: 106
    Given: 184
    The link between backtest and trading psychology

    Looking for the ideal risk reward ratio through backtest, will make you confident psychologically. Many undisciplined traders often move his Stop Loss level when his trading position in floating profit or floating loss, consequently the plan of Risk Reward ratio is not working properly (often just hit SL but TP is not achieved).

    How did it happen? A common problem with this case is that the trader is not confident with their trading system. Why? Because they don't backtest properly their trading system. Of course that's a big problem and very serious. How can we possibly have good confidence in trading while we do n' have the history data of our trading system?

    That's why there is a link between the backtest and our psychological condition. Eventhough you have a good trading system, but if you don't have the historical data from your trading system, then it will affect your trading quality psychologically, affect your discipline, so you violate the risk reward ratio rules, you seem to have flexible risk reward ratio without rules at all.

    Conclusion : Don't trade if you don't have a backtest data of your trading strategy.

    Not allowed!

Page 1 of 10 12345 ... LastLast

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •