this approach has ups and downs, you might end up with break even or you might end up with big profits for trades running longer in your direction. Keep a cautious eye on your trades and try to close them with calculated profits to outnumber the losing trades

Chris, the outcome of flipping 1000 coins will ultimately provide 50% Heads and 50% Tails. The higher the attempts, the less “skewed” the outcome. 1000 trades may move one to the 50% win rate. Combining this with a 2:1 (R;R) provides an Expectancy value of 0.5, which is very good- 50 cents on the dollar. Good/Excellent entries and exits actually enhance the R:R of 2:1, making it achievable. Trust this makes sense. Aiming for breakouts with attendant false breaks may provide higher R:R but also lower win rates. It all balances.

I agree with Chris I too have tested this senario over a 10 year period. The results were chopy and up and down results around 50% but over big enough timespan the spread kills you. Also somepairs were significantly poor.

Generally :-( The risk to reward should reflect the type of strategy you are using. A breakout type strategy would have a better risk to reward but lower win percentages. Reversal generally has a better win but less less risk to reward. Also I agree with entry exit with more emphasis on exit. Lots of people talk about entry but with out good exit it will make no big difference. An exmple of this would be conners 2 period RSI. A set stop gives you poor results. ATR is a little better, combined with a moving average it increases significantly, you could try a trail of some sort. The point is the exit is as important to the entry. Static set stoplosses in my opinion are open to whipsawing. But just because I cant get it to work doesnt mean it doesnt.

Keep in mind I never really like to make HARD rules about the market these are generalisations, I find what maynot have worked in the past given my new found experience knowledge will often work in the future. Its the systems wholistic conbinations that make it a better system.

These views are true. Samples are not enough and results could have ended in a loss or breakeven. But the point of this article is to prove that with proper risk reward, even random entry has a chance to win or not loose, whereas without it and consistent good money money management losses are almost guaranteed, which is why most traders struggle and fail.

Chris, thanks for your views. I agree entry and exit are the most important factors… but traders won’t be profitable in the long term without correct money management. a good strategy (entry and exit ), money management and long term consistency are the key ingredients to trading success.

The only component that can be computed is how much you are willing to lose on a trade. Even then you could get a gap that will skew that number as well.

Risk/Reward can only be computed after the trade.

Far more important than entry are your exits, your position sizing and following your system.

I’m afraid that you have fallen into one of the traps in statistical thinking that catch out many unwary traders.

In a market with random entries, setting a 2:1 risk reward (or any other ratio) will result in zero profit, less the cost of trades when tested over a large number of trades. This is because the probability of price hitting the stop is inversly proportional to the distance of the stop from the entry point. Also 20 tests are not neary enough to give your test any sort of statistical validity. At least a few hundred tests would typically be required.

The fact that you obtained a small profit from this test is purely luck. It could have just as easily ended in a lost.

What you correctly say is that it is the edge, due to your high probability entry that determines the outcome. It is also this edge that enables you to take advantage of a risk return ratio of 2:1 or whatever.

Random entry on its own won’t work if you test it over a sufficiently large number of trades. In other words there is no intrinsic edge in how you sets your stops.

Interesting points Ben, but i don’t believe in ever risking more to gain less, this makes no sense to me. Your theory may be correct to some extent, but what I do works well so I won’t be changing it.

Thanks again for a great article and the desire to help others.

thanks, keep up the good work!

Slight bias to trade with recent momentum on 4 hour chart, but really it was completely a random entry..

All the best and thanks for your tutorials, Max

Best wishes David

Appreciate very much for the educational articles especially risk reward. Thanks very much.

Thanks dude ..
I really enjoyed writing this article., so I am glad you liked it.
I know many members who have used the concepts of risk reward etc, to turn there trading around, I really think this is important. Risk reward and sticking to the trade is the key.

I would say this is the best article you have ever
written and is exactly what I needed to understand.
Instead of getting hung up on each trade individually
I need to evaluate many trades over time. I always talk myself out of trades not wanting to lose but I need to take all the valid trades and let the risk reward work out.

Thanks
Carl

Pay it forward.. share it with others , that’s why I post it, glad it helps.. enjoy.

Thanks

John

Thanks for sharing results of your experiment. Rather clear and to the point. Risk/Reward plus all your previous advice have given me opportunities from the ground up to become a successful trader. I enjoy each article.

Your student

The second reason is to thank you so much Nial for your love, support & free sacrifice to humanity. I have’nt met you in person but I can feel you, &,am almost certain that you are soft and kind person.

Hope to see more of me soon.
Thanks you so much Nial & I wish you the very best in Life.
From Nigeria

thanks for the feedback, I appreciate the praise :)

great experiment, very powerful example of risk to reward scenario, I have actually seen a similar experiment done before and surprisingly the results were practically the same, so i guess it just goes to show that if you cut your loses short and let your profits run longer that system in it self will keep your account in good health, add to this the edge of price action and it can’t be clearer
”a winning combination”..

I must say that since i have been applying your price action method to my trading it just gets better week in week out… nice one mate, best regards…

Thanks for the wishes and glad to see you are safe.

It will all depend on the chart, if a 200 pip profit looks possible, and the setup is valid, then if you are using a 100 pip stop.. the 200 pip target will make sense. However, alot of the time, we have the ability to tweak the stop loss to be less pips, and that means the target will become less. The article above was done on intraday 4 hour chart, so the stop loss was obviously tighter/smaller. If your trading the daily chart, and looking for a 2 to 1 risk reward, then there just make sure the chart, levels and trend allow for this. You would ideally be trading in a trending market.