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Thread: A proper trading system with RRR and Winning rates

  1. #1
    Trader ara's Avatar
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    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.

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  2. #21
    Trader Goldenstein's Avatar
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    Quote Originally Posted by naeem555 View Post
    Tonycee, its good but if we lose from more orders and earn from less orders, our trding is really hard if we understand the real trade but here we have many issues which make it hard like this market is based on prediction and we become confuse in every order, after every order we become more confused and change our decision and lose here
    hard to explain this but then we must stick to our trading plan and make sure we do not risk more to get little. if we are willing to risk big money but in the end we only earn little profits then i think it is not worthy to do. i do prefer with your next sentence that we better earn from less orders since profits even if that small is still better than one cent loss.

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  3. #22
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    It is necessary that all traders should be very patient and manage a good trading system that is more consists of money management, this is a business that is more risky, so it is safety of all traders to have a good management system at all time, when you have a good risk reward ratio then there is a possibility for you to have a good survival in your trade.

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  4. #23
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    This no doubt is a very brilliant thread from you sir on the importance of the (RRR) Risk Reward Ratio. You have rightly observed so many things among traders before you posted this thread and your observations are quite correct. There are so many things that we are not getting right here as traders in connection with how we manage our risk, like you have said,it is not just enough to have a good trading strategy, but it must come with some good risk reward ratio so that at the end of the day, we can be able to have some positive evidence in or hand of our involvement with the market.A good trader with a bad risk reward ratio is still a bad trader.

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  5. #24
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    Honestly a trader that really follows and works according with proper risks management will definitely achieve and last in forex market, it is really good for all traders to work with (RRR) risk reward ratio, having risk management alone is not enough we should always apply rewards management in our trade as a newbie trader that really thinks of succeeding in forex market.

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  6. #25
    Trader ara's Avatar
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    Quote Originally Posted by coolless View Post
    Honestly a trader that really follows and works according with proper risks management will definitely achieve and last in forex market, it is really good for all traders to work with (RRR) risk reward ratio, having risk management alone is not enough we should always apply rewards management in our trade as a newbie trader that really thinks of succeeding in forex market.
    Logically, forex is about probability, there are only 2 options, up and down, if we do not involve emotion or psychology, then win and loss is fifty fifty if we trade with 1: 1 Risk Reward Ratio. If we want to prove that this logic is true, then we can asking a child to trade, usually a child will do it without any emotional factors at all.

    Okay, In order for the material that I submit in this thread to be more clear, as I mentioned in page one, I will try to practice.
    Let we see... :

    An example of how to do the right backtest:
    For example, I have a trading system with a rule like this:
    Pair: GBPUSD
    Entry rules: OP at 10:00 server time or during London session opening
    Exit rules: left entirely on TP and SL
    Buy sell rule: If candle at 9 is bearish, then OP sell, if bull OP buy, if doji, no trade.
    Stop loss: fixed 30 pips...

    Well, then I expect you have a trading system first, at least have the rule as above. This is just an example.

    Now with a trading system like that, let us backtest by using some combination of risk and reward ratio, we see later winning rate each combination of risk reward ratio.

    And this results from backtest for 2 weeks :
    Note : I will only take 10 trades for this backtest, remember....., The more trades the better to determine the risk reward ratio.

    Combination 1, risk reward 2: 1 (SL 30 pips, TP 15 pips)
    1st trade: Sell, TP
    2nd trade: Buy, SL
    3rd trade: Sell, SL
    4th trade: Sell, SL
    5th trade: Buy, SL
    6th trade: Buy, SL
    7th trade: Sell, TP
    8th trade: Sell, TP
    9th trade: Buy, SL
    10th trade: Sell, TP
    Total: 4 TP, 6 SL
    Acquisition: profit 60 pips, loss 180 pips, accumulation: loss 120 pips
    Combination 2, risk reward 1: 1 (SL 30 pips, TP 30 pips)
    1st: Sell, TP
    2nd: Buy, SL
    3rd: Sell, SL
    4th: Sell, SL
    5th: Buy, SL
    6th: Buy, SL
    7th: Sell, TP
    8th: Sell, TP
    9th: Buy, SL
    10th: Sell, TP
    Total: 4 TP, 6 SL
    Acquisition: profit 120 pips, loss 180 pips, accumulated : loss 60 pips
    Combination 3, risk reward 1: 2 (SL 30 pips, TP 60 pips)
    1st: Sell, TP
    2nd: Buy, SL
    3rd: Sell, SL
    4th: Sell, SL
    5th: Buy, SL
    6th: Buy, SL
    7th: Sell, TP
    8th: Sell, TP
    9th: Buy, SL
    10th: Sell, SL
    Total: 3 TP, 7 SL
    Acquisition: profit 180 pips, loss 210 pips, accumulation: Loss 30 pips
    Combination 4, risk reward 1: 3 (SL 30 pips, TP 90 pips)
    1st: Sell, TP
    2nd: Buy, SL
    3rd: Sell, SL
    4th: Sell, SL
    5th: Buy, SL
    6th: Buy, SL
    7th: Sell, TP
    8th: Sell, TP
    9th: Buy, SL
    10th: Sell, SL
    Total: 3 TP, 7 SL
    Acquisition: profit 270 pips, loss 210 pips, accumulated : profit 60 pips
    Combination 5, risk reward 1: 4 (SL 30 pips, TP 120 pips)
    1st: Sell, TP
    2nd: Buy, SL
    3rd: Sell, SL
    4th: Sell, SL
    5th: Buy, SL
    6th: Buy, SL
    7th: Sell, TP
    8th: Sell, TP
    9th: Buy, SL
    10th: Sell, SL
    Total: 3 TP, 7 SL
    Acquisition: profit 360 pips, loss 210 pips, accumulated: profit 150 pips
    From the above data history, the good risk reward ratio to be used by my trading strategy is 1:5 risk reward ratio.
    NOTE : Remember !!!! Market conditions are always changing all the time, so we should periodically backtest to determine which RRR is best for our trading strategy. You can change the RRR ratio in accordance with the changing market conditions periodically, or at least once a month for day traders, once a week for a scalper, four months for a swing trader, or once a year for long-term investments. It is up to you, importantly, you should update for RRR from your trading strategy.

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    Last edited by ara; 06-20-2018 at 09:53 AM. Reason: edit some words

  7. #26
    Trader ara's Avatar
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    Fixed RRR and Flexible RRR

    Before speaking further, I will describe two types of Risk Reward Ratio. In my previous post, I divided 3 types of RRR based on your Stop Loss Take Profit. But here I will only explain 2 types:

    1. Fixed Risk Reward Ratio, we use fixed RRR, unchanged and unaffected by analysis in determining Stop Loss and TP.

    Example:
    We used 1: 3 RRR for all trades, then we can use 10 pips Stop loss, and 30 pips Take profit. Or 20 pips Stop loss, and 60 pips stop loss, or you can specify yourself based on 1: 3 RRR, I'm sure you know how to do.

    2. Flexible Risk Reward Ratio, we use flexible or non-fixed RRR, which means always changing according to market conditions based on the analysis that we make.

    Example:

    I have a rule of placing SL and TP, I put SL few pips below support for long trades, and few pips above resistance for short trades. I put TP few pips near resistance for long trades, and few pips near support for short trades.

    First trade
    2018-06-22_223436.png
    In my first trade, I trade on AUD/USD 1 hour time frame, I put 20 pips stop loss, and 60 pips take profit. This mean I take 1:3 RRR

    Second trade
    2018-06-22_223727.png
    In my second trade, I trade on USD/CAD 15 minutes time frame, I put 10 pips stop loss, and 10 pips take profit. This mean I take 1:1 RRR

    Also in my third trade, I will put my SL and TP based on the rule and analysis.
    In this flexible RRR, SL and TP always change based on rule and analysis.

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  8. #27
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    the risk reward ratio differ from one trader to another according to his strategy used and his ability for making of profits, and the experience plays an important role in this condition, the good trader always increase the reward ratio and so he can make more money than the trader tht has less experience and just want to catch some pips.

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  9. #28
    Trader ara's Avatar
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    Quote Originally Posted by sameeh View Post
    the risk reward ratio differ from one trader to another according to his strategy used and his ability for making of profits, and the experience plays an important role in this condition, the good trader always increase the reward ratio and so he can make more money than the trader tht has less experience and just want to catch some pips.
    Risk reward ratio is a profitable key, whoever you are, a newbie or a professional, you can be profitable just by setting a good risk reward ratio, even if you used the worst trading strategy which you think. Suppose you make a trade in accordance with your feeling. Please test by yourself whether my words is true or not. In my last post, I tried to share the results of my backtest, it was a regular strategy, not special, in fact I never used such a strategy. But you can see the results, such a strategy can be profitable, the key is preciseness in setting risk:reward ratio. Thus, backtest is important to know which risk:reward ratio is profitable for your trading strategy.



    Formula To Know The Relationship Between Risk Reward Ratio and Winning Rate

    My RRR and winning ratio discussion is pretty clear. But a new question arises, how to calculate the winning ratio or hit ratio if we already have a fixed RRR? how many percent of us must TP to remain profitable?

    This is the formula for calculating the hit ratio to keep it profitable. There is a simple formula to calculate the percentage of winnings required with fixed RRR to remain profitable. The formula: Winning Rate= 1/(Reward/Risk + 1)

    Example

    If your RRR = 1:2
    Then Wining Ratio = 1 / (2/1 + 1) = 1/3 = 33%
    That is: it takes a winning ratio of more than 33% of all trades to gain profit

    If your RRR = 1:1
    Then Wining Ratio = 1 / (1/1 + 1) = 1/2 = 50%
    That is: it takes a winning ratio of more than 50% of all trades to gain profit

    If your RRR = 1:1/2
    Then Wining Ratio = 1 / (0.5/1 + 1) = 1/1.5 = 67%
    That is: it takes a winning ratio of more than 67% of all trades to gain profit

    If your RRR = 1:3
    Then Wining Ratio = 1 / (3/1 + 1) = 1/4 = 25%
    That is: it takes a winning ratio of more than 25% of all trades to gain profit

    If your RRR = 1:5
    Then Wining Ratio = 1 / (5/1 + 1) = 1/6 = 17%
    That is: it takes a winning ratio of more than 17% of all trades to gain profit


    With the above formula if we have fixed RRR that has been set for our trading system, then we can easily calculate on paper how much the percentage of winnings (TP) if we want to profitable.

    Now I want to calculate how many winning ratios which I needed for the trading strategy that I am testing in my trading journal: 1:7 Trading Strategy

    I used 1:7 RRR
    % of Winning should more than = 1 / (7/1 + 1) = 1/8 = 12.5%
    This mean that I have to win more than 12.5% in order to profitable, It means, I have to win at least 2 trades from 10 total trades ..., or at least 13 trades from 100 total trades. Then why there are some member ask me to learn and practice again when I got 7 loss trades in a row? Is not it even though I get 60 loss in a row but I still can be profitable if I can get 13 trades total or more in my next trades.

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    Last edited by ara; 06-26-2018 at 08:40 PM. Reason: edit some words

  10. #29
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    Quote Originally Posted by ara View Post
    Risk reward ratio is a profitable key, whoever you are, a newbie or a professional, you can be profitable just by setting a good risk reward ratio, even if you used the worst trading strategy which you think. Suppose you make a trade in accordance with your feeling. Please test by yourself whether my words is true or not. In my last post, I tried to share the results of my backtest, it was a regular strategy, not special, in fact I never used such a strategy. But you can see the results, such a strategy can be profitable, the key is preciseness in setting risk:reward ratio. Thus, backtest is important to know which risk:reward ratio is profitable for your trading strategy.
    I agree it is equally important for new and old trader to use risk and reward ratio in our trade because that will clear our target and we set our risk before enter so in losses it will also give us confidence to make trade always clearly and it will be useful to work and to make good plan for earning better from this risky market .

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  11. #30
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    It's very good we think on the chances of minimizing risk and have a better target for profits in forex. Good risk to reward ratio makes us still survive even when we have less percent of wining times. This is one secret any good trader must put in their trade because it gives them the very best opportunity to work for a good trade. I make the necessary plans to manage risk and for me it's been a great process for me to trade good.

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