A very important concept that we @ Global FX Trading continue to stress is why you want to maintain a 2-3:1 reward: risk ratio. If you can achieve that ratio consistently, it will help you become more profitable over time, reduce the stress of believing that you have to “win every trade” and allow you to concentrate on proper risk management, relative strength and weakness, position sizing and an objective exit strategy that lets the market take you out.
.. To illustrate, let’s look at 2 major professional sports leagues.
In the NBA, the 3 point shot has become a bigger part of the game. Hence the players have realized the value of it allows you to make only 33% of 3’s to equal making 50% of 2’s.
In Major League Baseball the On base percentage (OBP)was what was measured. How many singles , doubles or triples did you have. Now it’s all about the home run. Strike outs are ok. Why? Because the HR has more value compared to singles, doubles and triples. So you can be a .200 hitter and long as you hit HR’s you can strike out more often . Therefore you don’t have to be right as often.
Bottom line….Your win % can be lower when you increase the amount of profit you take. This makes using relative strength and weakness analysis to pick the most uncorrelated pairs more valuable as you’ll exceed your ratio quicker. Additionally, when you are trading less, but focus around a catalyst like a news events or a specific chart pattern, the energy created will provide the movement needed to increase volatility. When you concentrate on currencies that are moving, your efficiency goes up. You make more pips on less winning trades. Because you risk management stays the same.
Example…. 75% winning trader with 10 pips risk and 1:1 R:R ratio= 75 pips profit-25 pips loss= 50 pip gain.
60% trader,10 pips 2:1 = 120 pips -40 pips = 80 pip gain.
50% trader,10 pips 3:1=150 pips – 50 pips = 100 pip gain.
As you can see, if you improve your reward: risk ratio, you can decrease your win percentage. Therefore you don’t have to be afraid of stepping up to the plate because you don’t have to be right as often. The pressure and ability to win 70-80% of the time can affect your judgment. But when you are less concerned about being right you’ll put more emphasis on pair selection and limit your trading to when the market has energy.
You let the winning trades move as far as they can and limit those losers to a predetermined % of risk. This will improve your confidence and your emotional state as you accept losers as an acceptable part of Trading. Combined with a solid risk management strategy, you can spend you time hunting in the right area, selecting the most uncorrelated currency pairs and develop an exit strategy that keeps you in the trade for as long as possible.
When you’re an 75% trader and you experience a slump of 4 losers in a row (50% chance) what do you do? The pressure to maintain a higher winning % probably forces you to do one of two things. Increase your position size to win it back quickly or look for a revenge trade just to trade. Or both.
Trading is all math. And the sooner you realize that what you think or want the market to be is irrelevant, the better you’ll be. Trade the market in front of you. Your #’s matter. And sometimes you’ll win or lose a trade purely out of blind luck.
As the markets are either consolidating or expanding, so traders experience winning and losing streaks.
Discipline, patience and consistency!! The keys to success!
Happy Trading
If you have an interest in any area of Forex Trading, this is where you want to be.
Global Fx Trading Group is a world leader in providing Fx services to individual traders, including: Unmatched funding programs, on-line education, virtual trading rooms, automation tools, robot building, and personal coaching.
The company was first established by Jeff Wecker, former member of the Chicago Board of Trade, with 25 years in the industry. Jeff has a keen understanding of the needs of Forex traders and those needs are our focus.
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