Hi everyone I need help with the above topic. I’m trading forex and my setups always have 2 target profits. So, when price gets to my TP1 I’ll close half of my position and the rest of it when price gets to my TP2. Now, my understanding is when people ask me what my trading system RRR is then my answer would be 1.5: 1. (When price gets to my TP1 the reward is 0.5 then another 1 when it gets to my TP2). Is this correct? The reason why I ask this question is because I bought a trading journal software last month and after spending a couple of weeks trying to learn its features and how to use them, I just realised that the software calculates RRR based on entry price and exit price, not in terms of dollar risked. So for my case the software can’t record every trading setup that I take in one journal entry. I need to record the entry price, exit price, and my TP1 in one journal and then create another one when price gets to my TP2. Now this is the part that I get confused. The software says that my RRR when price gets to my TP1 is 1 and when it gets to TP2 the RRR is 2. Following is the explanation that I got from the software creator: The R-Multiple measures the trade in terms of Risk (R-Multiple stands for Risk Multiple). So the general formula is R-Multiple for a buy trade: (Exit Price - Entry Price) / (Entry Price - Stop Loss Price) An R-Multiple of 1 then means that your exit price was the same distance from your entry as your stop loss. Is this how you guys calculate your Reward Risk Ratio? Thank you for your time and help.
No information about your stop loss provided so RR hardly makes sense. What happens when price goes against you? you also close half at "SL1" and after that "SL2" I believe all these variations doesn't change your expected return really..
Hi doggyfx Thank you for your reply. Sorry if my explanation was not clear enough. I'll try to explain it again using an example. Let's say I want to short G/U. SL is 57 pips, my TP1 is 57 pips and TP2 is 115. Position size is 0.02. When price goes against me, I'll just let it hit my SL. So when price hits my TP1 I'll close half of my position and the rest at TP2. My question is when price goes to my TP2, is my total reward risk ratio 1.5 : 1 or 2:1? Thank you.
FWIW, you are just wasting your time with such text book rubbish, no doubt instigated by Van Tharp or some other fancy pen waver. Trading any market you choose is really simple. First, you must understand the basics of what drives the prices for your chosen market. Next, you must have adequate capital and not rely on leverage (a true fools game). Next, you must come up with a valid approach (the hard bit of course). Last, and not least, you must trade what you see and only risk a small ℅ of your total capital on each trade - a good number is 1℅ until you can make money every week. That is it really, anything else is just time and money wasting. Don't take my word for it, just look at what you are now doing and your results. If you keep doing the same thing then you will keep getting the same results, so make sure you do it right ASAP. You are welcome!
%% Good points. Dr Van Tharp had some real good points on a trading plan; not that many will find was it [daytrade] Your Way to Financial Freedom book?? I did a speed read my copy, last month. I dont think he ever recommended leverage, or 4x learning to trade.--if he did I AM Not. I dont agree with Dr Van Tharp's rather negative comments[ my opinion] on swing -position trading also, in that book. But read anything with discretion.Leverage is NOT anyone's friend learning too trade/invest; trend is friend.Hope this helps; helped me [Edit comment the best RRR on leveraged stuff is most likely not going to help.But trading size-- if you accidently lost all your position -that may help]
In that example, your R:R is indeed 1.5:1, as you've correctly calculated, provided that (i) you don't ever adjust the stop-loss at any stage while the trade's running, and (ii) you're closing exactly half of your position at T1 and the other half at T2. The "115" should be 114, for it to be exactly 1.5:1, I suppose, but that's splitting hairs. (Your overall position size and your leverage don't affect your R:R ratio, but I think you knew this already.)
FWIW I actually credit a lot of my success to Van Tharp. His books do not give system advice they mostly give psychological mindset and risk management advice. Explanations of why such advice is given with clear logic to present those pieces of advice are also given. Having said that there are some things I agree with wtfauoa on and those are the basics of how to trade. I also agree no more than 1%. I chose 0.75% until I had some data proving my methods work and how often. THEN you can do simulations with your data and adjust risk amounts to try to optimize a bit more. Again, these are all explained by Van Tharp in his book "The Definitive Guide to Position Sizing". I also see some mistakes in your scaling out. You are limiting your upside and capping your profit. By scaling out you have more trade fees (not usually a major issue unless you are under capitalized) and you are limiting your profit by selling at 2R (2 x amount risked). Usually people require 3:1 RRR to say it's a worthwhile trade. Yours is 1.5:1. Why not just trade 1% and skip the 1st TP scale out? Then get entirely out at 2nd TP. That would yield the same profit and lower your risk depending on when you choose to move your stops to break even. It also would lessen the amount of capital in a trade and open you up for more trade opportunities. Of course there is one important flaw with your method that I am not sure you are aware of,...if you have only slightly more than 50% losers you will eventually lose it all. With a 3:1 RRR you can be right 33% of the time and still breakeven. With 1.5:1 its 40% just to break even. No one trades perfectly and no one can predict if you will have a sudden loss of 5R if som world event is triggered. That could devastate a system like yours. It's not as simple as saying "ok, I'll just take profits at 3R and problem solved." But you never gave any info on win rate and whether or not your trades actually ever even make it to 2R or 3R. I suspect they don't do that often because you have chosen such quick profit targets. Sounds to me like you need better stop loss placement and risk management as well as better exit strategies. For this Van Tharp is very good at giving advice. I suggest you read his books. They helped me, but your results may vary. Eganon
And the same here: he was my original information-source on the hugely important and widely underrated subject of position sizing, and immensely valuable to me, as such. (Later, I "graduated" to Ralph Vince, who was even more useful - and posts here occasionally.) Indeed ... and for this reason he's not a popular author with people who imagine that they can make money simply by "copying something that just 'works'," but to be fair those readers were never going to become profitable anyway, without a fundamental change of perspective and re-education. I fully agree.
It is always said (from Van Tharpe) that you can't have a high R multiple and high win rate. One has to give. Is this the case in reality? It seems like textbook theory. I'm sure there must be some people who have high R multiples and high win rates as they may be entering in such a place or time where they can keep their stop loss very close so increasing their R multiple. Thoughts?
There are exceptions, but Van Tharpe is right. It is not textbook theory. If you go to mql5's best trading robots, they either have high win rate or high R (profit ratio). https://www.mql5.com/en/signals/mt5?orderby=gain