Risk Reward Ratios are often times overlooked by most traders nowadays, and the theories underlying these ratios, in this discussion, risk reward ratio, are often times under-studied. Traders are so caught up by established candlestick patterns, which in some instances, don’t necessarily work, unknowingly underestimating the importance of learning and understanding the fundamentals running this structured knowledge. Thus, they go out and complain that the market is against them, and the like.
This video will tackle a sound risk reward ratio strategy that works in today’s market which will definitely help you tremendously in your trading career.
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Risk Reward Ratio
Welcome to this video on risk reward ratio for forex, stock trading, day trading and well, this applies to swing trading as well for that matter. So here’s the big issue. A lot of people out there will say things like, well, I won’t take a trade unless it has a better than three to one reward to risk ratio, four to one reward to risk ratio, five to one, reward to risk ratio, whatever it might be, and that’s all great. However, I want to share with you some real-life considerations when you’re taking a stance like that. The first issue is that risk reward ratios are generally inversely correlated to win-loss ratios. If you want to have more winners than losers, you’re going to have to be willing to take some trades that don’t have as good a reward to risk ratio, and that’s a psychological issue.
We’ll come back to that a little bit. So trades with the higher risk reward ratio tend to have a lower win-loss ratio. Why is that? There is a very clear reason. That’s because it’s simply easier to determine a short-term move in the market. Why is that? Well, because as more time goes by where things can happen in the market to change the market sentiment, and this is why; one of the reasons why I should say that the trades that have a better risk reward ratio, they take more time to develop and therefore they’re less likely to complete. And so when I want to say they have a worse win-loss ratio, I mean to completion. What we’re expecting it to have as a final target doesn’t mean you’d lose money necessarily if you manage your money well, but it’s less likely to complete its pattern.
What is Risk Reward Ratio
Let’s talk about a trade that has the best risk reward ratio, which is a reversal trade where you get in at the end of a trend, and then you’re looking to trade a new trend in the opposite direction. That is the single best reward to risk ratio trade there is. The average trend last five waves. So there is wave five right there. Now we would say, this is statistically the time to take a trend reversal trade and catch a trend in the opposite direction before it even confirmed and therefore get a fantastic reward to risk ratio. Definitely better than three to one, usually even better than a five to one reward to risk ratio. These are so phenomenal. So sure, we all love to risk a little bit to make a lot and that’s fantastic.
Here’s one of the challenges. So this particular trend went seven waves instead of five. And this is one of the challenges, it is very difficult to determine when exactly a trend will end. Five is statistically the average, but because it’s an average by definition, there’s got to be some trends that last only three waves. Now there are another seven waves and, therefore, again, you’re not going to have a good a win-loss ratio. You get stopped out here, for example, and this will turn into a losing trade. Another problem with trend reversal trades is that they’re the best reward risk ratio trade. But most trends don’t actually reverse. In other words, even if I really take this trade here and go short, odds are the market will stop trending. But it’s not typically going to immediately reverse and go into a downtrend.
Trading Risk Reward Ratio
What happens at the end of most trends is that they just kind of go sideways. There’s a cycle in the market of trending and non-trending, and what most likely will happen is that the market will go into a non-trending cycle. Then again, trading trend reversal trades. Sure, great reward to risk ratio, but only when they complete, and they do not complete most of the time. So here’s another example, again, you’ll see that we get the same thing where we get five waves and then it goes down and, that’s not it. If we would have taken this long for a trend reversal trade, it went down to meet another lower low. First of all, let me give you one solution to this when I trade trend reversal trades – yes, five waves is the average trend.
I don’t want to trade within the average. When I take trend reversal trades, I actually wait for wave seven. That means that sometimes the market will stop trending after wave five, and I won’t get an opportunity to take a trend reversal trade. That’s okay. I want that market to be more extended. I want it to be beyond the average because I have actually a really good chance then that seven is going to be the final low. Now, does that then give me a guarantee that the market will go up into a new uptrend? No, but what I like to do is what I call a hybrid trade. So scalp trades, okay. What has a better win-loss ratio since these big long trend trades or trend reversal trades that have a very good reward to risk ratio traits don’t have as good of a win-loss ratio?
Risk Reward Ratio Indicator
What has a good win-loss ratio, scalp trades, but then again, conversely, scalp trades don’t have as good of a reward to risk ratio. So I do a hybrid. What I simply do is I will take some profits if I take this long, which this is a typical trend reversal trade for me. That’s a half cycle right there. And so I lock in some profits there, in other words, as a hybrid, I’m doing a little quick little scalp trade, lock in some profits, and then adjust my stop, put in a trailing stop. This way I’m golden, right at this point really can’t lose, especially if I have my position hedged and so forth. And that’s really the key. Psychologically, it’s very important for most traders, including myself – to have more winners than losers.
And if I have more winners than losers, and I get some big trades in there as well, then that’s just the best of both worlds for me. So this is what I do; I’ll take a full position, I’ll take part of my position, also my profits at the half-cycle. By the way, if you’re interested, my cycle indicator to share with you how the cycles work and how we measure them mathematically with precision, feel free to send me an email at support@topdogtrading.com. I also make Webinars, pretty much every week, sometimes twice a week where I actually give away my cycle indicator for free and give you a 40-minute tutorial on how to trade it and that’s how we determine where these numbers go. You see the notations of the numbers and the ABCs and so forth.
How to Calculate Risk Reward Ratio
That’s all done with my cycle indicator. Happy to give that to you for free. Anyway, we trade a half-cycle, we lock in some money because that half cycle is a super high win-loss ratio. Rarely do I get a loss on that. Then I moved my stop and now, I’m golden. Wouldn’t that be great to be golden on every single trade? And again, then our win-loss ratio. It was through the roof and even if it’s small, a bunch of small little winners at the end of the day or the end of the week is, it adds up. And then not only that, but you ended up then getting some big wins as well. Now let’s take that off and let’s see what happens here because I want to share with you another problem when people say, I will only take these big win-loss ratio trades.
Okay, we’re going, and then we’re good. It’ll fit in the chart. So this one worked right? This trend reversal trade worked and indeed our risk is tiny. This is literally the risk on the trade and our reward is huge. That’s somewhere there; probably right in about, there would be our reward. So, reward to risk ratio. Fabulous, we love it. We’d like to have these every day of the week or every hour of the day. The problem here though, if you look at this, is that the longer the trend continues, in this case, trend reversal trade. But the longer the market moves, the more fluctuations come in on their journey to the top. Psychologically, this would be a bit challenging from here to here and not a big deal from there to there.
Risk Reward Ratio Forex
Not a big deal from here all the way down to here. Here’s the question, could you stay in when it broke this low, for example. Would you still stay in? And this is very typical of long-term moves. They get these big fluctuations from the time you get in over here to the target over here and it becomes psychologically challenging to hang in there for the whole movement because you see your P & L, you’re given the money back, we’ll give you money back, give him any back.
These are things that you need to consider, and some of them are personal decisions as to your own trading psychology, what you’re comfortable with and so forth. So the bottom line is I’ll end with this. A lot of it is personal. You need to decide what works for your brain cells, so understand too that scalp trades occur more frequently. That gives you more trades every day or every week if you’re a swing trader, and they give you satisfaction. They help you with the problem of getting bored. If you’re only going to take trades that have a very high reward to risk ratio, you’re going to get bored and you’re going to get antsy. And when traders get bored and antsy, they tend to make mistakes and it’s not as satisfying.
Rubber Band Trade Strategy
Now, if you’re a really patient person and you can do that, that’s fantastic. Then that might be the way to go for you. If you find yourself needing more trades and getting reckless because you’re not getting enough trades, you might want to incorporate a scalping trading into your trading as well. Pick up some of those quick profits along the way, waiting for the big moves. And to me, again, that combination is really the best. So, my friend, if you like this video, please understand that it’s free. I give away a lot of free education and I just ask that if you got value from it. You pay it forward by clicking on the share button and sharing good things with other people.
That’s really the best thing you can do. If you’re watching on youtube, give it a thumbs up and leave a comment because I really love your comments. The encouraged me to keep providing more free tutorials for you. Also, I’m giving you one of my favorite trade strategies called the rubber band trade. It has a very high wind loss ratio talking about high win-loss ratios. This is probably the highest win-loss ratio trade I’ve ever seen in my life. Happy to share it with you absolutely free. Just click on the little icon there at the top right-hand corner of the video. I’ll be happy to email it to you. Also, there’s a link in the description box below. You can click on that if you’d prefer, and then once you do that, I will personally email the video to you with the rubber band trade strategy.
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