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1:1 Risk/Reward Frowned Upon?

  • Post #1
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  • First Post: Feb 4, 2021 2:00pm Feb 4, 2021 2:00pm
Hello all. It seems that the trading community as a whole is widely against using a 1:1 risk/reward ratio and constantly preaches to aim for at least a 2:1 ratio whether it be on forums, youtube videos, chat rooms etc. I recently started thinking why is this the case? I personally come from a blackjack card counting background. At the very best counters will get a 3% edge over the casino (win about 53% of the time). Sports bettors are considered amazing if they can hit at a 55% rate and are legendary if they can get 60%. There are plenty of people that made tons of money at these professions with a relatively small edge. From what I've seen in the trading community, if someone has a system or strategy that hits around 55-60% of the time at 1:1, the first comments usually say to increase the risk to reward ratio... do people not understand how amazing it would be to have a 5-10% edge like that??? Do people in the trading community just set unrealistic expectations like having a 3:1 risk to reward ratio and expect that to hit over 50% of the time?? I would love to hear your thoughts as to why this is the case.
Quoting ccrkk10
Hello all. It seems that the trading community as a whole is widely against using a 1:1 risk/reward ratio and constantly preaches to aim for at least a 2:1 ratio whether it be on forums, youtube videos, chat rooms etc.
You can look at it this way, 1:1 ratio is a good place to take partial profits and move your stoploss to breakeven +2 lets say, and allow the rest to run.
You coud trail stop or aim for valid market structure where price could reverse to cash in the rest after that, be it 1:1.5 1:2 or any ratio the market allows.
MS such as previous daily, weekly/monthly lows/highs, Average Daily Range for the pair, if you can see it then others can also. etc.
Follow the Money
Quoting ccrkk10
Hello all. It seems that the trading community as a whole is widely against using a 1:1 risk/reward ratio and constantly preaches to aim for at least a 2:1 ratio whether it be on forums, youtube videos, chat rooms etc. I recently started thinking why is this the case? I personally come from a blackjack card counting background. At the very best counters will get a 3% edge over the casino (win about 53% of the time). Sports bettors are considered amazing if they can hit at a 55% rate and are legendary if they can get 60%. There are plenty of people...

Hi ccrkk10,
I agree with you completely. For most of us the edge in trading is small, comparable to the blackjack and sports betting situation. A trader who can consistently achieve 60% success at 1:1 R:R is doing really, really, well. I have made a living from trading for several years now averaging 55% success and a R:R fractionally over 1:1. The edge really doesn't have to be big to be adequate, but does have to be continually extracted over time with excellent discipline, consistency and risk control. That is the hard bit that most don't manage.

As for bigger R:R targets, it essentially comes with a corresponding reduction in the likely success rate so the expectancy remains much the same overall. There is no magic in big R:R ratios, it just represents a different style of trading and pattern of returns than 1:1.
Always good to set a high R:R, say 10 to 1

Trail the stop loss, sure you get some break-even trades

Look at Gold yesterday

Maximize wins, minimize loss, stay in the game as long as you can
In the long run, you are never going to know for sure how much pips/points in favor you are going to get on any given trade.. period; it doesnt matter how many lines, indicators, or whatever crap you want to believe in, there is not a sure "oh yea, the market its going to move to this area/level/round number because of *insert funny justification over here*" method to know this

return its variable and never 100% accurate, what you MUST focus is in to win more than you eventually lose (there are ways to ensure this) on any trade you place.. that and proper price/chart reading WILL give you the edge long term to make money in this activity

Fixed returns vs risk is a long trading myth that needs to die already, its old, stupid and doesn't work in real life.. level up =)
Risk to Reward is the key to a winning trading strategy. If you are not employing a R:R strategy and you are unprofitable then this is why.

1:1 overall average R:R requires >50% win rate to be profitable.

Trade 1: Risk 10 pips. Reward 10 pips. Win = +10 pips
Trade 2: Risk 10 pips. Reward 10 pips. Loss = -10pip
Net: zero pips
Obviously winning every other trade which is 50% win rate with 1:1 R:R is an overall breakeven game except for cost of trades then it's a losing game. Sure, not every trade will be 10 pips but long term trading with a consistent 1:1 R:R money management will average out and eventually become unprofitable if not just a slowly eroding account.



Trade 1: Risk 10 pips. Reward 10 pips. Win = +10 pips
Trade 2: Risk 10 pips. Reward 10 pips. Win = +10 pips
Trade 3: Risk 10 pips. Reward 10 pips. Loss = -10 pips
Net: 10 pips
Winning 2 out of 3 trades or 66% win rate.

Trade 1: Risk 10 pips. Reward 10 pips. Win = +10 pips
Trade 2: Risk 10 pips. Reward 10 pips. Win = +10 pips
Trade 3: Risk 10 pips. Reward 10 pips. Win = +10 pips
Trade 4: Risk 10 pips. Reward 10 pips. Loss = -10 pips
Net: 20 pips
Winning 3 out of 4 trades or 75% win rate

Winning 66% is a challenge. Winning 75% is really a challenge.

In a 1:1 R:R scenario one loss requires one win to make up the loss then another win to get back positive.

Now do the math for 2:1 and then 3:1 and you will have your answer why 2:1 is just okay and 3:1 is so much better.

Inherent in R:R when trading is the fact that one is trading based on an expected number of pips to win or lose therefore market structure comes into play. Therefore some idea of where the trade is going to profit and where a reasonable exit is, is key. Not consistently exiting accordingly reduces the R:R.
Thank you all for the comments. I also just want to make it clear I'm not trying to argue or suggest one way is better than another, but to instead have a thoughtful discussion. I guess the biggest thing that jumps out to me is the fact 99% of the trading education suggest to follow the trend and let your winners run/cut losses short. Yet 90% of traders fail. Obviously some of that is due to psychology and not being able to properly execute a trade, but I find it hard to believe that the vast majority of traders are failing because of psychology. I believe it's more due to the fact that they don't have a trading edge. Because so many traders fail using the same strategies, I personally try to avoid that at all cost and use range bars and keep my risk/reward relatively tight like a sports bettor fading the heavy public action. Again, I'm not saying there isn't value in big risk/rewards and I know traders that succeed with them, but it seems like the alternative 1:1 risk to reward strategy is so frowned upon and people don't see the value in having a 5-10% edge.
R:R does not imply a fixed profit target (PT) and stop loss (SL) for every trade. One trade may have a PT of 30 pips with a SL of 10 pips. The next trade a PT of 15 pips with a SL of 5 pips and the next trade a PT of 60 pips with a SL of 20 pips. All are 3:1 trades hence a 3:1 R:R. Do this over the longterm with a reasonable overall trading strategy and you are likely to be profitable. If not then it's not the R:R that is your problem it is your trading strategy.

Just for grins I did the math for 2:1 and 3:1.

2:1
Trade 1: Risk 10 pips. Win 20 pips.
Trade 2: Risk 10 pips. Loss 10 pips.
Net: 10 pips
2:1 will be profitable with a 50% win rate so a win rate > or = 50% with a 2:1 R:R is a winning R:R strategy. Not considering the cost of trading one can lose 2 trade after one win and still be at breakeven.

3:1
Trade 1: Risk 10 pips. Win 30 pips.
Trade 2: Risk 10 pips. Loss 10 pips.
Net: 20 pips.
This is a 50% win rate and obviously profitable. Now one can lose 3 trades for every win. Of course the trade sizes may be different so this must be factored in but in the long run as stated before things will average out and the R:R will prevail.

Trade 1: Risk 10 pips. Win 30 pips.
Trade 2: Risk 10 pips. Loss 10 pips.
Trade 3: Risk 10 pips. Loss 10 pips.
Net: 10 pips. So now one can win 1 out of 3 trades or 33% and still be profitable with a 3:1 R:R.

Personally I trade with 3:1. Every trade I take must have a high probability of 3x my stop loss. If not then I just pass on the trade. This has made all the difference in my trading.
Quoting ccrkk10
Thank you all for the comments. I also just want to make it clear I'm not trying to argue or suggest one way is better than another, but to instead have a thoughtful discussion. I guess the biggest thing that jumps out to me is the fact 99% of the trading education suggest to follow the trend and let your winners run/cut losses short. Yet 90% of traders fail. Obviously some of that is due to psychology and not being able to properly execute a trade, but I find it hard to believe that the vast majority of traders are failing because of psychology....
Just do the math.

99% lose because they do not have follow sound money management but instead believe in what I think is the myth: an edge.

My edge is R:R. My trading strategy is not rocket science. No secret indicator or combo of indicators. Just sound analysis which by the way involves trading with the trend most of the time. All my trades are planned with profit target and protective stop loss placed at the time of the trade entry. Once entered I do not intervene. It must hit my profit target or my stop loss. I can't tell you the satisfaction of banking a 3:1 trade. I don't ever lose a 3:1 trade that gets to profit target because I don't "let trades run". Cutting your losses is inherent in having a sound money management plan with a reasonable R:R which 1:1 is not because it is unlikely you and most traders can achieve a consistent 66% win rate which is what 1:1 requires to be profitable.

Just saying.
  • Post #10
  • Quote
  • Edited 9:39pm Feb 4, 2021 9:07pm | Edited 9:39pm
Quoting ccrkk10
Obviously some of that is due to psychology and not being able to properly execute a trade, but I find it hard to believe that the vast majority of traders are failing because of psychology. I believe it's more due to the fact that they don't have a trading edge.
You are a normal adult with normal logical observation and interpretation. Normal. Does not take a genius to figure out why traders fail.

But we find only TRADERS and gamblers fail to understand such simple logic. Its easy for the rest of the normal 8billion adults.

One more thing only TRADERS and gamblers believe money management can magically turn a losing strategy into winning.

About your topic, it depends on whether the trader trades a convergent or divergent strategy. That's the short answer. For the long answer use Google.

Good to know not all traders lost their logical thinking ability.

https://www.forexfactory.com/thread/...ing-profitable
Trade the value
Tank you for bringing this issue to the forefront once again. As you've noted, this issue has long been debated and punched around by many "expert" and game theory protagonists. But the issue isn't as simple or clear cut as simply a math equation, and this is what many who promote game theory fail to recognize. Games have rules that do not exist in the market environment. And risk is more than simply placing money as risk of loss. The market simply doesn't care what is "should" do after a certain number or losses...it may continue sending you "losing signals" until you stop trading either by failure or frustration.

Ris-to-Reward is just a number and is useful but not in the way many propose. It is not a number to place a target exit, (either by stop or limit). But more to measure what is available to the trader and now efficiently he/she is using their capital. This tool is much more useful by telling "where"in the move you are getting in. Are you a contrarian trader entering near a swing point? If so your potential reward is usually many times your risk, but the probability of a successful trade may not be appealing. Do you prefer to wait for "confirmation"? If so this confirmation in price also costs pips that you don't capture while you are waiting for the confirming signal...therefore your stop is farther away and your potential for profit has also eliminated many of those multiples in reward, leaving you with just 1:1.

Are you one of those who is stopped out only to find your trade goes your way after hitting your stop (Affectionately called the "FU stop")...Then your stop is too close. Do you exit only to see price continue on for several more candles...more often than not? Then perhaps your limit is too close.

One trade may place a stop at a predetermined number of pips from his entry, another may use a swing point, which by definition will have a variable number of pips distance. You can't just boil it down to a RRR number and use it like blackjack. Unlike in this game, the market can keep dealing you queens until you loose everything, or continue dealing you 3's until you're just about to win, and THEN give you the queen. There are no rules in this game...it us up to YOU to determine HOW you relate to the price movements and how efficient you are at capturing the largest percentage of each move.

This is done by keeping records far beyond numbers like RRR. You should be tracking how often you are exiting with more room to go, or if you are holding too long, and watching your once profitable trade evaporate because it didn't hit your neatly calculated math target.

Here are some questions to consider BEFORE you settle on what RRR is right for you:

  1. How close to the last swing point are you entering the move? (How many pips away is that extreme point?)
  2. How many pips does price continue in your direction before collapsing?
  3. Are you willing to live through retraces or pull backs? If so for how long? or how many pips?
  4. How often does price move against your entry just after you've entered? Or does it move quickly in your direction?
  5. Do these "drawdowns" represent risk?

There are many more questions I could pose that all effect a potential RRR and I hope you can see that it is more than just preselecting a given target and stop price. And probability is only the beginning. Even worse, this probability is variable according to how you trade...not to mention the psychological aspect that created yet another variable in these calculations.

Do more of that which succeeds and less of that which does not - Dennis Gar
Quoting Winston Reed
{quote} Just do the math. 99% lose because they do not have follow sound money management but instead believe in what I think is the myth: an edge. My edge is R:R. My trading strategy is not rocket science. No secret indicator or combo of indicators. Just sound analysis which by the way involves trading with the trend most of the time. All my trades are planned with profit target and protective stop loss placed at the time of the trade entry. Once entered I do not intervene. It must hit my profit target or my stop loss. I can't tell you the satisfaction...
Thank you for the input and math you provided. Maybe it's just because of my background and who I am, but I never understood why so many people don't comprehend the money management side of trading. I just have a hard time believing sooo many people get the money management and psychology wrong. Personally I believe that a skilled trader can make money in the market with just about any R/R ratio.
Quoting BWilliam
{quote} You are a normal adult with normal logical observation and interpretation. Normal. Does not take a genius to figure out why traders fail. But we find only TRADERS and gamblers fail to understand such simple logic. Its easy for the rest of the normal 8billion adults. One more thing only TRADERS and gamblers believe money management can magically turn a losing strategy into winning.

Define a winning strategy:____________________
Define a losing strategy:_____________________

Winning strategy: a strategy that is profitable
Losing strategy: s strategy that is not profitable

Profitable strategy: a strategy that over a defined period of time will result in measurable profit using a relatively defined set of rules including R:R.
Unprofitable strategy: a strategy that over a defined period of time results in consistent losses using a relatively defined set of rules including R:R.
Chaos: A strategy that over a defined period of time results in inconsistent profit/loss using ill-defined rules and zero R:R.
Quoting ccrkk10
{quote} Thank you for the input and math you provided. Maybe it's just because of my background and who I am, but I never understood why so many people don't comprehend the money management side of trading. I just have a hard time believing sooo many people get the money management and psychology wrong. Personally I believe that a skilled trader can make money in the market with just about any R/R ratio.
It's interesting how people presented with clear facts and logic still question the veracity of R:R and insist "that a skilled trader can make money in the market with just about any R/R ratio." It is impossible.
If you are in fact profitable for a considerable period of time and are not consciously using a R:R strategy then in fact your unknown R:R is the reason why you are profitable. You only need examine your trades historically, determine the R:R through this examination and then you will know why you are in fact profitable. Yes your trading strategy obviously works but only in the context of the R:R that you are unaware of.

If you are in fact not profitable with the same strategy being used by the person in the above situation then you need only examine your trades historically to determine the R:R which will most assuredly be a losing R:R.
Quoting DonPato
Tank you for bringing this issue to the forefront once again. As you've noted, this issue has long been debated and punched around by many "expert" and game theory protagonists. But the issue isn't as simple or clear cut as simply a math equation, and this is what many who promote game theory fail to recognize. Games have rules that do not exist in the market environment. And risk is more than simply placing money as risk of loss. The market simply doesn't care what is "should" do after a certain number or losses...it may continue sending you "losing...
Nice analysis and thank you for the post. I completely agree that while blackjack and trading have similarities for psychology and money management, they are two different animals when it comes to technical factors and EV. What I'm more so trying to get at is the fact that the entire trading education community preaches you MUST have at least a 2:1 RR. For example, If I said I had a proven system that worked over many market conditions that hit at a 55% rate with a 1:1 RR and got about 20 trades a week from this. I don't think the majority of traders understand how robust and effective that is. Again, the end goal for every trader should be to make profit and keep drawdown to a minimal but it just feels like a smaller RR is always completely shoved to the side.
Quoting ccrkk10
Thank you for the input and math you provided. Maybe it's just because of my background and who I am, but I never understood why so many people don't comprehend the money management side of trading. I just have a hard time believing sooo many people get the money management and psychology wrong. Personally I believe that a skilled trader can make money in the market with just about any R/R ratio.
The casinos rake in billions with this 2.7% house edge without micro-managing money management for every spin of their thousands of roulette tables except setting table limits to define their risk exposure. Think about that.
Trade the value
well , i have bad experience with RR , i spent 11 years in Forex , i almost tried everything but honestly that RR not really worked with me and i was very disappointed , and also i didn't saw anyone winning at long term , i saw some made profits but lost later and disappeared others just show nice and successful trade but hide their total performance .
you have to choose between RR or win rate , i think no one can get both. if you want to risk 1 for win 10 then don't expect high win rate, in forums they always give example saying:
if you risk 1:1:
trade one:you risk 10 to win 10
trade two: you risk 10 but lost 10
total:0
if you risk 1 to make 2:
trade one:you risk 10 to win 20
trade two: you risk 10 but lost 10
total:+10
///
But reality not like that they ignore win rate factor and long term results ,
lets say person risk 3 for win 1 and he took 10 trades:
he won 8 and lost 2 so let's say he making 10$ for every win trade and lose 30$ for every lose trade:
total will be: 80$-60$=+20$ in profits.
then lets see other trader who risk 1 for make 3
he lost 8 and won 2 trades
total will be 60$-80$=-20$ Loss!

in short: RR not mean anything without other factors like win rate , etc.
i made research about that topic and i surprised there is some successful traders never use that RR theory , they even risk 3 and 4 for win 1 ,
one of them is CEO of one of famous prop firm out there!

so if RR work with you then you use it , if not you thinking outside box : find what working for you in long term and use it , no need to change your way because someone told you can't trade without good rr

i will post that quote i read in article before i go:
Quote
Most unrealistic expectations come from social media, and some of the traders around you lie or conceal their real trading results. Therefore, you should skip such sources and only focus on your learning, practice, and trading.
Quoting DonPato
Tank you for bringing this issue to the forefront once again. As you've noted, this issue has long been debated and punched around by many "expert" and game theory protagonists. But the issue isn't as simple or clear cut as simply a math equation, and this is what many who promote game theory fail to recognize. Games have rules that do not exist in the market environment. And risk is more than simply placing money as risk of loss. The market simply doesn't care what is "should" do after a certain number or losses...it may continue sending you "losing...
R:R must not be rigid, as I have said, but rather tuned to what the market has to offer. What the market potentially has to offer is determined by the trader in the context of his analysis and trade strategy. If "what the market has to offer" is within the traders defined R:R then the trade should be taken. If not the trade should be abandoned.

Getting out too early as in before profit target is hit or before stop loss is hit is the same as not having a R:R strategy. IMHO once you have entered a trade in the context of your R:R and the profit target and stop loss are determined then you should not exit early under any circumstance. One could however determine a potential "let your profit run" but only when your profit target is achieved and then your profit target should be your new stop loss. If you let price surpass you profit target but then exit below the 3:1 profit target on a pull back then you have just killed your R:R. This is why accepting the outcome of a successful 3:1 will more often trump a so called "let your profits run".

Examining in hindsight trades that went further than your target after you take profit is an exercise in futility. There is never anything wrong with taking your profit when it happens accordingly to your R:R. Except if you are using 1:1 then you will never fell like you are getting enough and will start "letting your profits run" which will lead to misery.
Quoting JsCave
well , i have bad experience with RR , i spent 11 years in Forex , i almost tried everything but honestly that RR not really worked with me and i was very disappointed , and also i didn't saw anyone winning at long term , i saw some made profits but lost later and disappeared others just show nice and successful trade but hide their total performance . you have to choose between RR or win rate , i think no one can get both. if you want to risk 1 for win 10 then don't expect high win rate, in forums they always give example saying: if you risk 1:1:...

LOL. R:R cannot be separated from win rate. The win rate determines if your R:R is profitable. You can ignore R:R all you want. It's there whether you realize it or not. The conscious decision to control it is the difference.
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