Hi everyone. In the pursuit of success in forex, traders tend to focus on finding a strategy that gives the highest accuracy of entry. The pursuit of perfectionism in trading blinds their eyes and does not let them see the "forest for the trees". So, what are you missing out on? What important detail is missing from your trading plan?
The profit/risk ratio is your advantage.
In this article, we will look at how you should calculate your risk-to-profit ratio for your working trading system. A Forex trading system should include a well-defined equity management system that is easy to follow. Money management is one of the most important aspects of any trading strategy (TS) today, but most traders neglect the whole concept of money management in their trading. Most forex traders want to focus on the entry points provided to them by their trading systems. Their dream is to find a TS that gives a buy entry signal at the lowest point on the chart and a sell signal at the very top!
The entry point is undoubtedly important. But do not forget that at the moment of entry, we can create an advantage not only in the exact entry into the trade, but also in creating a favorable statistical expectation. Specifically, by putting a good profit to risk ratio into the trade. Trading is a game of probability. We know that in N% of trades we will lose and that in X% of trades we will win. But we need to remember that we can easily improve our stats by simply ignoring trades where the profit potential does not exceed the potential loss by at least a factor of two.
It is the presence of money management in your trading strategy that reduces your losses and makes you hold on as a winner. I say "makes you" because you have built into your trading system a certain percentage of profitable trades, the knowledge of which will screen out your emotions in the process of trading.
Applying this simple money management system will give you a general idea of how to propel your trading exponentially forward and in a positive way. In this article, I will explain how, by developing your trading system, you will determine the size of a position before you open it. Please remember that these are the basics to help you think properly. The exact calculations, specifically for your strategy, you will need to do on your own.
"We've all heard the famous trading axiom: cut your losses, and let the profits run. This is the aspect of money management in your trading system that produces big winners. Money management puts aside the subjective feelings that are present in people. "
Richard Dennis
“I'll say it again: I never made my money by trading; I made my big money by waiting and letting my profits grow."
Jesse Livermore
The first aspect we have to understand about our trading system is that our system gives us a positive expectation. We can only do that by testing, but sometimes testing can give a negative result if you forget to set a profit to risk ratio for each trade of at least 1:1.5 in the rules of the strategy. All beginners say that a forex trading system without 90% of profitable trades sucks, and they will surely develop their own holy grail to the envy of others. They are wrong, of course.
In Pursuit of Perfection
For all the trading systems really working in the Forex market, it is important to note that:
- Professional traders are looking for performance, while novice traders are looking for perfection.
- Beginner traders are looking for quick profits.
Most novice traders get hung up on the number (percentage) of successful trades rather than total profits. They all buy into a system that is advertised as 90% winning. The question is, "What good is a system that provides 90% winning trades with an average win of 12 pips if you have to tolerate 60 pips of risk to achieve a win?" Do you see where I'm going with this? It's like your best friend after taking 3 karate classes is ready to fight 6 muzzleloaders in an alleyway. He's obviously going to lose)
Probability of bankruptcy of a trading account as a function of the percentage of profitable trades and the profit to risk ratio.
The table above shows the dependence of the probability of "losing" the deposit on the percentage of profitable trades in your trading system and the profit/risk ratio in each trade. Thus, we can see that even if your strategy works 60% of the time but the profit/risk ratio is kept at least at 1.5:1, you can already be sure that you will not lose all your money. But if the ratio of profit to risk is 1:1 with the same 60% of profitable trades, the probability of losing the deposit in a series of losing trades is 12%.
A profit/risk ratio of 1.5:1 or more is the right way to think about trading. The minimum characteristics of a profitable strategy is 40% of winning trades with a profit/loss ratio of 2:1 (see the table above). According to this table, if you make 100 trades (each one following the same rules) and you have a 40% winning trade with a 2:1 profit/loss ratio, your risk of ruin would be about 14%. This is the minimum point from which the system can be considered working.
What is the most important piece of information regarding risk of loss?
Let me help you out. Having a high winning percentage is not an indication that you'll come out a clear winner. If you have 55% winning trades with a 1:1 risk to profit ratio, then your risk of going broke will be in the neighborhood of 27%. So, if you're trading in a similar way, in addition to that it's better to have fewer positions with higher profits!
Overall, 42% winning trades with a 1.6:1 profit to risk ratio would also be a good option. That means you would take 1.60 pips out of the market for every 1 pip you risk. For example, by risking 40 pips, you get 64 pips. If the market turns against you (when volatility occurs), you adjust your stop up or down.
If your stop-losses and take-profits vary from trade to trade, try skipping trades where the profit/risk ratio is less than 1.5:1. And you'll see how your overall trading statistics will improve.
Conclusion
I hope this article will help you in forming and optimizing your own trading strategy. Don't get hung up on perfection, but search for and work through profitable trading patterns and profit will come to you.
The profit/risk ratio is your advantage.
In this article, we will look at how you should calculate your risk-to-profit ratio for your working trading system. A Forex trading system should include a well-defined equity management system that is easy to follow. Money management is one of the most important aspects of any trading strategy (TS) today, but most traders neglect the whole concept of money management in their trading. Most forex traders want to focus on the entry points provided to them by their trading systems. Their dream is to find a TS that gives a buy entry signal at the lowest point on the chart and a sell signal at the very top!
The entry point is undoubtedly important. But do not forget that at the moment of entry, we can create an advantage not only in the exact entry into the trade, but also in creating a favorable statistical expectation. Specifically, by putting a good profit to risk ratio into the trade. Trading is a game of probability. We know that in N% of trades we will lose and that in X% of trades we will win. But we need to remember that we can easily improve our stats by simply ignoring trades where the profit potential does not exceed the potential loss by at least a factor of two.
It is the presence of money management in your trading strategy that reduces your losses and makes you hold on as a winner. I say "makes you" because you have built into your trading system a certain percentage of profitable trades, the knowledge of which will screen out your emotions in the process of trading.
Applying this simple money management system will give you a general idea of how to propel your trading exponentially forward and in a positive way. In this article, I will explain how, by developing your trading system, you will determine the size of a position before you open it. Please remember that these are the basics to help you think properly. The exact calculations, specifically for your strategy, you will need to do on your own.
"We've all heard the famous trading axiom: cut your losses, and let the profits run. This is the aspect of money management in your trading system that produces big winners. Money management puts aside the subjective feelings that are present in people. "
Richard Dennis
“I'll say it again: I never made my money by trading; I made my big money by waiting and letting my profits grow."
Jesse Livermore
The first aspect we have to understand about our trading system is that our system gives us a positive expectation. We can only do that by testing, but sometimes testing can give a negative result if you forget to set a profit to risk ratio for each trade of at least 1:1.5 in the rules of the strategy. All beginners say that a forex trading system without 90% of profitable trades sucks, and they will surely develop their own holy grail to the envy of others. They are wrong, of course.
In Pursuit of Perfection
For all the trading systems really working in the Forex market, it is important to note that:
- Professional traders are looking for performance, while novice traders are looking for perfection.
- Beginner traders are looking for quick profits.
Most novice traders get hung up on the number (percentage) of successful trades rather than total profits. They all buy into a system that is advertised as 90% winning. The question is, "What good is a system that provides 90% winning trades with an average win of 12 pips if you have to tolerate 60 pips of risk to achieve a win?" Do you see where I'm going with this? It's like your best friend after taking 3 karate classes is ready to fight 6 muzzleloaders in an alleyway. He's obviously going to lose)
Probability of bankruptcy of a trading account as a function of the percentage of profitable trades and the profit to risk ratio.
The table above shows the dependence of the probability of "losing" the deposit on the percentage of profitable trades in your trading system and the profit/risk ratio in each trade. Thus, we can see that even if your strategy works 60% of the time but the profit/risk ratio is kept at least at 1.5:1, you can already be sure that you will not lose all your money. But if the ratio of profit to risk is 1:1 with the same 60% of profitable trades, the probability of losing the deposit in a series of losing trades is 12%.
A profit/risk ratio of 1.5:1 or more is the right way to think about trading. The minimum characteristics of a profitable strategy is 40% of winning trades with a profit/loss ratio of 2:1 (see the table above). According to this table, if you make 100 trades (each one following the same rules) and you have a 40% winning trade with a 2:1 profit/loss ratio, your risk of ruin would be about 14%. This is the minimum point from which the system can be considered working.
What is the most important piece of information regarding risk of loss?
Let me help you out. Having a high winning percentage is not an indication that you'll come out a clear winner. If you have 55% winning trades with a 1:1 risk to profit ratio, then your risk of going broke will be in the neighborhood of 27%. So, if you're trading in a similar way, in addition to that it's better to have fewer positions with higher profits!
Overall, 42% winning trades with a 1.6:1 profit to risk ratio would also be a good option. That means you would take 1.60 pips out of the market for every 1 pip you risk. For example, by risking 40 pips, you get 64 pips. If the market turns against you (when volatility occurs), you adjust your stop up or down.
If your stop-losses and take-profits vary from trade to trade, try skipping trades where the profit/risk ratio is less than 1.5:1. And you'll see how your overall trading statistics will improve.
Conclusion
I hope this article will help you in forming and optimizing your own trading strategy. Don't get hung up on perfection, but search for and work through profitable trading patterns and profit will come to you.
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bit.ly/3spSQqC
🔻FREE Telegram channel🔻
t.me/DeGRAMChannel
🔻Contact for Paid SIGNALS🔻
t.me/DeGRAMForex