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In this video you are going to discover why using 2:1 or 3:1 reward to risk ratio for your trades isn’t a very good idea. In fact, I am going to show you a real study in detail demonstrating what happens when you take trades with a reward to risk ratio between 0.5:1 and 5:1

When looking at a potential trade to make it is quite common to look at the potential profit available which we call reward. Clearly there is risk involved in every trade too. One common way to measure risk is by placing a stop loss.

For example a stop loss of 100 pips or points is our risk. We can also set a limit order to take profit at a predefined amount of pips or points too. In this case we will use a target or reward of 200 pips giving us a reward of twice our initial risk. Expressed as a 2:1 reward to risk ratio trade.

But how do we know that 2:1 is the best reward for any given trade?

In the video I am going to test different reward to risk ratios and back it up with real trading results.

If you didn’t already know, I am a mechanical or rule based trader. Which means I look for certain conditions to give me entry and exit signals for each trade.

The strategy I am running the test on is quite a simple but effective one which uses an inside daily bar as a setup and then a break of the high or low to buy or sellshort. I have ran the test on AUD/USD Forex pair over 10 years ranging from 1/1/2010 until 1/1/2020.

The risk is calculated by the range of the inside daily bar, or by subtracting the low from the high. For example 120 pips. So the stop loss is 120 pips away from our entry price. So a profit target of 240 pips would give us a Reward to Risk ration of 2:1

The normal exit I use for this strategy is a timed based exit at the end of the trading session. So regardless of whether the trade is in profit or a loss, I will close the position at the end of the session.

The actual strategy isn’t the focus of this video though. The focus is to test various reward to risk ratios (profit targets) to see how the performance changes.

I have programmed the strategy and included an additional profit target using Multicharts platform which I use to test and trade strategies.

Watch the video to see the results of the test.

A few important points to note about choosing Reward to Risk ratios:

* Every strategy and market has a different optimal Reward to Risk ratio – what works for one, won’t always work for another.

* Sometimes using a fixed Reward multiple as an exit will lose money as you can see in this article.
When using a fixed Reward multiple you are forcing your requirements onto the market. Sometimes the market will only offer what it has to offer.

*Often time based or signal based exits are far more profitable than using a fixed Reward multiple as a profit target.

*There are other factors such as winning percentage which determine the profitability of a trading strategy.

In addition don’t believe everything you read! You will often read about only taking 3:1 or 2:1 Reward to Risk ratio trades. But quite often these statements are either very old and/or not backed up by proof.

I recommend you test everything before trading live with real money. You can run back tests like the one I have displayed in this article. But back tests aren’t fail proof as they only show you what has worked in the past. But wouldn’t you rather trade something that has proven to work well in the past than something that has continuously lost money in the past? I know I would!

Click through to the blogpost link to get the rules of the original profitable strategy used in this test.

[ Ссылка ]

DISCLAIMER:

I am not a financial advisor and I am not offering you financial advice. I am not regulated in any way. The purpose of the content I provide is for educational purposes only.

Any information you receive is based on my own knowledge and experience in the financial markets and how you act on the information provided is your own responsibility.

I cannot be held responsible for any losses you may incur as a result of ideas taken from my content provided.

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