Win Rate, Risk/Reward, and Finding the Profitable Balance
You generally need to make a choice in your trading Forex: either have a high win rate % and low risk reward (hedge traders or scalp traders) or low win rate % and high risk reward. (day traders and swing traders).
Either can be successful, but it is a personal choice and different style of trading. Sometimes you can change depending on: pair, price, time & session that you are trading. End of Tokyo to end of London is high volume and liquidity daily time, so day trading might work and swing trading mid week. Hedging is mostly a high end money way of trading related to taking positions on both sides of a pair and scalping is going for many trades in same session, but make little pips per trade, but having high leverage per trade. These are great anytime of session, but do pretty good during low liquidity and volume times.
Win-rate is how many trades you win, usually given as a percentage. Such as 50%, 5 out of 10, or 50 out of 100. Means 50% of trades placed result in a profit.
Win rate is what many people focus on. They want to be right, often! Yet reward:risk (R:R) is just as important. R:R is how much a trader wins on winning trades versus how much they lose on a losing trade.
Most day traders focus on the win rate or win/loss ratio. The allure is to eventually reach that stage where nearly all their trades are winners. While this appears to make sense, having a high win rate doesn't mean you'll be a successful trader or even a profitable one. Your win rate is how many trades you win out of all your trades. For example, if you make five trades a day and win three, your daily win rate is three of five or 60%. If there are 20 trading days in the month, and you win 60 out of 100 trades, your monthly win rate is 60%.
Anbat, thanks for this. So if I understand correctly a scalper will look for >50% win rate whereas a day trader will look for >20%.
In order to complete the picture it would be good to know the typical/expected RR ratio. e.g. 1.2 scalper and 2 day trader?
Appreciate your views. Stephen
Anbat
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@stephenede2310, ty, for comment, from my trading of last 8 years which I scalp, day trading and swing some I look for the following:
scalping: 1:1 to 1:2 or 12.5 pips stop loss risk vs 12.5 to 25 pips per reward on each trade with a 70% win rate %. Yes, my definition is 12.5 to 25 pips- to each their own. But will scalp for less sometimes.
Day trading (depends on pair, price, session & time- I stick with mostly pairs with around 100 pip ATR, now those are GBP and EUR ones), RR would depend on atr x 1.5 stop of a particular time frame 15 mn, 1 hr, 4 hr which I am day trading a high quality set up off of at that time- vs. target(s), if trade is started end of Tokyo and runs to London end (12 hrs) could give you up to 1:5 risk reward with a pair whom has 100+ atr. You may set a stop at 25 pips and trade profits 50 to 100 pips. I mostly seriously trade between those 12 hours- r/t high liquidity and volume. London end means done for session.
Please look at my latest article--- about the benefits of daily chart trading - less stress and emotions and noted on article chart (1:5 to 1:8 risk/reward). All about lot position size and patience. gl
stephenede2310
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@Anbat, that is fantastic. Most helpful. Thank you. I wish to trade EurUsd same 12 hours for day trading as you using 1h. Direction of Asian session unless key event.
If key event or low volatility then scalping.
I will try as you suggest and diary and monitor my success. Thanks.
In order to complete the picture it would be good to know the typical/expected RR ratio. e.g. 1.2 scalper and 2 day trader?
Appreciate your views. Stephen