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The great two-to-one scam

  1. While waiting to get back to trading with extremely limited equity in a very small live account (to see at what rate it grows), I decided to experiment with trading on 1-hour charts in place of my usual 15-, 5- and 1-minute charts to determine how much leeway I would need to give myself for me to be able to place my orders and then walk away from my trades without being stopped out due to the shenanigans of those pernicious market makers, so that I will no longer need to micromanage my positions.

    ScreenHunter_7042 Jan. 30 17.55.jpg

    I determined that it would be a minimum of 30, or better yet, 40 pips. This is…like…30 pips more than I would prefer, given how tiny my account is going to be—but it is what it is!

    So my next question is, am I going to set my profit targets 40 pips away in order to abide by the professional trader’s cardinal rule to trade with no less than a 1:1 reward-to-risk ratio? Or will I try to get away with a 1:2, 1:3, or possibly even a 1:4 ratio?

    My answer is: I’m going to try to get away with whatever I can!

    Also while I wait, I want to see how long it takes me to return this demo account I began trading on October 18, 2015 back to its original $100,000, which I traded down to about half of that in the process of designing a winning strategy, but that has grown from around $50,000 to almost $80,000 very quickly in the last week or two (now that the strategy is complete) via positions of 8-lots per trade.

    ScreenHunter_7041 Jan. 30 16.55.jpg

    I know there are many who will call me foolish not to insist on a minimum 1:1 ratio, but the title of this thread and the words that follow are not my own…

    "One of the key misunderstandings and prejudices I see again and again, even among experienced traders and so-called experts, is the cry I hear repeated so often that we should all be trading with a ratio of 2:1.

    "Risk reward ratios are no judge of the profitability of a system. To really see whether a system has an 'edge' you need to know the success rate. A lower reward ratio will inevitably have a better chance of winning, so what matters is matching up the two statistics in a way that suits you: reward ratio AND success rate.

    "Neither type of trade is 'better' than the other. They are different trading styles, and each has its merits. Whether you go for 4:1 or 1:4—or anywhere in between—what’s crucial is that you’ve still got that all-important edge."
     
  2. 4:1 is fine if you have a 97% win rate.