What is Reward to Risk Ratio | Forex Trading Basics
Planning your every Forex trade, you should know in advance the profit that you are aiming to make and the maximum amount of money you are willing to lose.
In this educational article, we will discuss risk reward ratio - the tool that is used to compare your potentials losses and profits in Forex trading.
What is Reward to Risk Ratio
Let's start with an example. Imagine you see a good buying opportunity on EURUSD. You quickly identify a safe entry point, your take profit level and stop loss.
From that trade you are aiming to make 100 pips with a maximum allowable loss of 50 pips.
To calculate a reward to risk ratio for this trade, you simply should divide a potential gain by a potential loss:
R/R ratio = 100 / 50 = 2
In that particular example, reward to risk ratio equals 2 meaning that potential gain outperform a potential loss by 2.
Let's take another example.
This time, you decide to short USDJPY.
From a desirable entry point, you can get 75 pips rerward with a potential loss of 150 pips.
R/R ratio = 75 / 150 = 0.5
Reward to risk ratio for this trade is 75 divided by 150 or 0.5.
Such a ratio means that potential loss outperform a potential gain by 2.
Positive and Negative Reward to Risk Ratio
Risk to reward ratio can be positive or negative.
If the ratio is bigger than 1 it is considered to be positive meaning that a potential gain outperforms a potential loss.
R/R ratio > 1
If the ratio is less than 1 , it is called negative so that potential loss is bigger than potential risk.
R/R ratio < 1
On the left chart above, the reward for the trade is bigger than a risk.
Such a trade has positive reward to risk ratio.
On the right chart, the risk is bigger than a reward.
This trade has negative reward to risk ratio.
Why?
Knowing the average risk to reward ratio for your trades, you can objectively calculate the required win rate for keeping a positive trading performance.
With R/R ratio = 0.5
2 winning trades recover 1 losing trade.
You need at least 70% win rate to cover losses of your trading.
With R/R ratio = 1
1 winning trade, recover 1 losing trade.
You require at least 50% win rate to compensate your losses.
With R/R ratio = 2
1 winning trade recovers 2 losing trades.
You will need at least 35% win rate to cover losses of your trading.
In the example above, the trading setups have 0.5 reward to risk ratio. In such a case, 2 winning trades will be needed to win the money back for 1 losing trade.
Forex trading involves extremely high risk. Risk to reward ratio is a number one risk management tool for limiting your risks. Calculating that and knowing your win rate, you can objectively decide whether a trade that you are planning to take is worth taking.
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Riskreward
Master Gold’s Breakout Strategy: Key Levels Explained!this chart of Gold Spot (XAU/USD), we observe several key technical features that guide potential trade decisions:
Forming Ascending Channel: The price is developing within an ascending channel, indicating a potential continuation pattern. This channel often signals further upward movement, but caution is needed, especially when the price is in a "weird" volatility zone or failing to make new lows.
LQZ Grabbed: This marks a liquidity zone where a price sweep likely occurred, gathering liquidity from stop-loss orders. The market can potentially reverse after this grab, pushing the price higher.
LTF Flags (1 and 2): These small consolidation patterns (flags) on the lower timeframe suggest continuation. The first and second flags could signify pauses in the broader trend, with the potential for either breakout or breakdown.
Failed Push into Descending Hover: This indicates a failed bullish push, transitioning into a descending pattern (hovering near a key level). A failed breakout could signal upcoming bearish pressure.
Price Path Projections: There are two scenarios represented by the green and yellow paths:
Bullish Scenario (Green Path): If the price maintains the ascending channel and breaks out from the flag structure, we could see higher prices above the liquidity zone (LQZ), likely towards the 4-hour resistance level around 2532.
Bearish Scenario (Yellow Path): If the price fails to hold, particularly breaking the ascending channel and descending, it could move lower toward the 1-hour LQZ around 2503.
In summary, the price action around the flags and the liquidity zones (LQZ) will dictate the next major move. Waiting for confirmation of either the bullish breakout or bearish failure would align with a high-probability setup.
How I Nailed a Perfect Breakout Trade Using a Simple Strategy*The following Analysis is made by my Trading BOT*
Analysis of Your Trade:
Descending Channel:
Formation and Breakout: The descending channel is well-defined, indicating a corrective phase following an impulsive move. The breakout above the channel suggests a potential reversal or continuation of the prior trend, which appears bullish.
Entry Timing: You entered the trade after the breakout from the descending channel. This entry aligns with a strategy to buy at the break of a corrective pattern, capitalizing on the resumption of bullish momentum.
Resistance Zone (Blue Area):
Initial Resistance Encounter: The blue horizontal line represents a resistance zone where price consolidated and failed to break higher on the first attempt. This is a good spot to watch for confirmation of a breakout or reversal.
False Breakouts: There are some upper wicks visible in this resistance zone, indicating possible false breakouts or liquidity grabs. This suggests that many traders might have been stopped out before the true breakout occurred.
Price Action Post-Breakout:
Sharp Move Down: After the breakout, price made a sharp move down to retest the previous resistance (now turned support), which aligns with the principles of market structure where old resistance becomes new support.
Correction and Continuation: The downward move appears corrective in nature, forming a series of lower highs and lower lows within a descending channel, after which the price breaks out and moves upwards sharply.
Risk and Reward Considerations:
Stop Placement: If your stop loss was placed below the previous swing low or the bottom of the descending channel, this would be a strategic placement to avoid being stopped out by market noise.
Take Profit: Your target seems to be well-placed, considering the previous highs or a key Fibonacci level. The green area likely represents the take-profit zone.
Volume Analysis:
Confirmation with Volume: The volume spike during the breakout from the descending channel and the subsequent move up indicates strong buying interest, which is a good confirmation signal.
Key Takeaways for Future Trades:
Pattern Recognition: Identifying descending channels and their breakouts is a strong skill that can be leveraged in various time frames.
Risk Management: Your trade shows a good understanding of risk management, especially if stops were placed beyond significant levels to avoid market noise.
Confirmation Signals: Waiting for volume confirmation during breakouts is an excellent strategy to avoid false moves.
Suggestions:
Multiple Time Frame Analysis: Ensure that your lower-time-frame trades are aligned with the higher-time-frame trends or setups to increase the probability of success.
Post-Trade Analysis: Continue reviewing your trades like this to refine your entry and exit strategies, especially around key zones like support and resistance.
Never Trade Without Stop Loss!
Hey traders,
Talking to many struggling traders from different parts of the world, I realized that the majority constantly makes the same mistake : they do not set a stop loss .
Asking for the reason why they do that, the common answer is that
these traders consider the manual position closing to be safer, implying that if the market goes in the opposite direction, they will be able to much better track the exact moment to cut loss.
In this article, we will discuss why it is crucially important to set a stop loss and why it is the number one element of your trading position.
What is Stop Loss?
Let's discuss what is a stop loss . By a stop loss , we mean a certain price level where we close our trading position in loss. In comparison to a manual closing, the stop loss (preferably) should be set at the exact moment when the order is executed.
On the chart above, I have an active selling position on Gold.
My entry level is 2372, my stop loss is 2381.
It means that if the price goes up and reaches 2381 level, the position will automatically close in a loss.
Why Do You Need a Stop Loss?
Stop loss allows us limiting the risks in case of unfavorable movements .
On the chart above, I have illustrated 2 similar negative scenarios : 1 with a stop loss being placed and one without on USDJPY.
In the example on the left, stop loss helped to prevent the excessive risk , cutting the loss at the beginning of a bearish wave.
With the manual closing, however, traders usually hold the negative positions much longer , praying for a reversal.
Holding a losing trade, emotions intervene. Greed and fear usually spoil the reasoning, causing irrational decisions .
Following such a strategy, the total loss of the second scenario is 6 times bigger than the total loss with a placed stop loss order.
Always Set Stop Loss!
Stop loss defines the point where you become wrong in your predictions. Planning your trade, you should know in advance such a point and cut your loss once it is reached.
Never trade without a stop loss.
4. e-Learning with the TradingMasteryHub - Risk Management 1x1🚀 Welcome to the TradingMasteryHub Education Series! 📚
Are you looking to level up your trading game? Join us for the next 10 lessons as we dive deep into essential trading concepts that will help you grow your knowledge and sharpen your skills. Whether you're a beginner or looking to refine your strategy, these lessons are designed to guide you on your journey to better understand the markets.
📊 Manage Your Risk with These Three Simple Methods!
In trading, managing risk effectively is crucial to long-term success. Even the best strategies can fail if risk management is ignored. In this session, we'll explore three key methods that every trader should master to protect their capital and stay consistently profitable.
1. Position Sizing: Trade Smart, Trade Safe
Position sizing is the foundation of risk management. I always set a daily and weekly stop-loss limit to ensure that I can recover mentally and financially from any losses. My daily stop-loss is capped at 5-10% of my entire trading account, and I never risk more than 30% of that daily limit on a single trade.
Each trade's risk allocation depends on the quality of the opportunity:
- 5-star setups: Up to 30% of the daily stop-loss.
- 4-star setups: Up to 15% of the daily stop-loss.
- 3-star setups: Up to 5% of the daily stop-loss.
I only trade 4-star setups and above to avoid overtrading and the temptation to jump into random market opportunities. This disciplined approach ensures that I’m only putting my capital at risk when the odds are strongly in my favor.
2. Stop-Loss Orders: Protect Your Trades with Precision
When setting stop-losses, I place them at strategic points highlighted by the market, such as significant support or resistance levels. To avoid premature stop-outs due to market noise, I set my stop-loss beyond the spread and the market’s natural fluctuations. For example, if the FDAX is in an uptrend with the last higher low at 17,000 points and the spread is 15 points, I would set my stop-loss at 16,967 points (17,000 - 15 - 17).
This ensures that my risk/reward ratio (R/R-ratio) is correctly calculated. Before entering any trade, I carefully assess whether the potential upside justifies the risk. If the R/R-ratio isn’t favorable, even for a 5-star setup, I might avoid the trade to protect my capital.
3. Diversification: Tailor Your Strategy to Your Comfort Level
Diversification is another critical aspect of risk management. As a trader, you can choose to focus on a handful of ticker symbols or spread your risk across a broader range of assets. The first approach, trading a few instruments, is easier to manage and ideal for strategies like market profile trading in FX or indices.
Alternatively, you might opt for a more diversified portfolio, trading up to 50 different stocks at once. In this strategy, each trade only represents a small fraction of your total risk capital—such as your daily stop-loss. This minimizes the emotional strain of trading, as each individual trade carries a smaller risk. With a solid strategy, you can manage all trades effectively, spreading your approach across calls, puts, different markets, industries, and volatility levels. However, this approach is typically better suited for larger accounts, where spread costs won’t significantly impact your profits.
🔚 Conclusion and Recommendation
Risk management isn’t just about protecting your capital; it’s about maintaining the psychological stability needed to trade consistently. By mastering position sizing, setting precise stop-loss orders, and choosing the right diversification strategy, you can navigate the markets with confidence and discipline. Remember, successful trading isn’t just about finding the right opportunities—it’s about managing those opportunities wisely to ensure long-term profitability.
By focusing on high-quality trade setups, calculating your risks accurately, and diversifying appropriately, you’ll find that you can maintain your composure even during losing streaks. This approach not only protects your account but also keeps your mind clear and your emotions in check, paving the way for sustained success.
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GOLD at a Tipping Point: Rally or Reversal?Comprehensive Analysis of XAU/USD (Gold vs. U.S. Dollar)
Across the 1-hour, 15-minute, and 4-hour charts, the current market structure of Gold against the U.S. Dollar (XAU/USD) reveals a critical juncture, with several key technical patterns and liquidity zones influencing potential price movements.
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1. Overall Market Structure: Large Ascending Channel (4-Hour Chart)
- Channel Formation: The price has been trending within a **large Ascending Channel** since early May, with well-defined higher highs and higher lows. This channel serves as the primary structure guiding the market’s long-term movement.
- Upper and Lower Boundaries: The upper boundary near 2474.774 (Daily LQZ) and the lower boundary near 2355.819 (Daily LQZ) are critical levels. The price is currently closer to the channel's upper half, indicating potential room for further upside but also a heightened risk of reversal.
2. Intermediate Market Structure: Recent Ascending Channel Breakdown (1-Hour & 4-Hour Charts)
- Smaller Ascending Channel: On the 1-hour and 15-minute charts, a smaller Ascending Channel had formed recently, suggesting a potential continuation of the upward move. However, this channel experienced a breakdown, indicating a shift in short-term momentum.
- Retest and Flag Formation: Following the breakdown, the price formed a flag pattern. This typically signals consolidation before continuation in the direction of the previous trend (which was down, post-breakdown). The resolution of this flag is crucial for the next significant move.
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3. Liquidity Zones (LQZs): Key Decision Points
- 1-Hour LQZ at 2441.637: A significant resistance level that the price is currently hovering near. Its strength has been tested, and it could either cap the current move or be breached if buying pressure increases.
- 4-Hour LQZ at 2458.954: Positioned slightly above the current price, this is another critical resistance zone, closely aligned with the broader channel's upper resistance area.
- Daily LQZ at 2474.774: This is a major resistance level that coincides with the upper boundary of the large Ascending Channel. If reached, it could signal an important inflection point.
- Support at 2402.417 (1HR) and 2355.819 (Daily): These are key levels of support that could come into play if the price fails to break higher and instead moves downward.
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4. Volume Analysis: Gauging Momentum**
- Recent Volume Trends: Across the charts, volume has shown signs of moderation, particularly during the formation of the flag pattern. This suggests a potential lack of conviction among market participants, which could lead to a volatile breakout or breakdown.
- Volume at Key Levels: It will be essential to monitor volume closely at critical LQZs and the flag pattern boundaries. A breakout with strong volume could confirm the direction, while a low-volume move might indicate a false breakout or temporary move.
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5. Mass Psychology and Market Sentiment
- Herd Behavior: The market is at a psychological tipping point. If a breakout from the flag pattern occurs, it could trigger a strong collective buying response, driving the price higher toward the 4HR and Daily LQZs. Conversely, a failure could lead to a rapid sell-off as participants rush to exit.
- Overextension and Exhaustion: The proximity to significant resistance levels increases the risk of overextension. If the price approaches the Daily LQZ at 2474.774, traders should be cautious of a potential reversal due to exhaustion of the bullish trend.
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6. Potential Scenarios and Strategic Considerations
- Bullish Scenario:
- Breakout Above Flag: A confirmed breakout above the flag pattern, supported by strong volume, could push the price towards the 4HR LQZ (2458.954) and potentially the Daily LQZ (2474.774).
- Continuation Within the Larger Channel: If the price clears the 4HR LQZ, it could target the upper boundary of the large Ascending Channel, aligning with the Daily LQZ at 2474.774.
- Bearish Scenario:**
- Breakdown from Flag: A breakdown from the flag, especially with increasing volume, could signal a short-term bearish move, targeting support levels at 2402.417 (1HR LQZ) and 2355.819 (Daily LQZ).
- Rejection at 1HR LQZ (2441.637): If the price fails to break the 1HR LQZ convincingly, it could lead to a retest of lower support levels, indicating a potential retracement within the larger channel.
- Neutral/Baseline Strategy:
- Wait for Confirmation: Traders might consider waiting for a clear breakout or breakdown from the flag pattern and observe how the price reacts at the nearest LQZs. This approach reduces the risk of being caught in a false move.
- Risk Management: Stops should be placed strategically around the flag pattern’s boundaries or key LQZs to protect against adverse moves.
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Conclusion:
The XAU/USD pair is currently at a crucial inflection point. The broader market structure, combined with recent developments in the 1-hour and 15-minute charts, suggests that the next significant move could set the tone for the short to medium term. Close attention should be paid to the flag pattern, volume behavior, and the reaction at key liquidity zones, particularly the 1HR and 4HR LQZs. A breakout could lead to a test of the upper boundaries of the larger channel, while a breakdown might see the price revisiting lower support levels within the channel.
This is a classic setup where waiting for confirmation before entering a position could offer a strategic advantage, allowing for more informed and controlled trading decisions.
Trading Psychology: The Key to Successful Investing🔷 Trading Psychology: The Key to Successful Investing 🔷
1. Introduction
Trading psychology examines how traders' emotional and mental states influence their trading decisions. Many traders believe that success in trading only requires technical analysis and market knowledge. However, controlling emotions and having the right mental approach are crucial elements for being a successful trader. This article will delve into why trading psychology is essential, the common psychological pitfalls traders face, and strategies to overcome them.
2. The Importance of Trading Psychology
Understanding trading psychology is vital because it helps traders recognize the impact of their emotions on their trading behavior. Emotions such as fear, greed, and overconfidence can lead to irrational decisions, resulting in significant losses. For instance, fear might cause a trader to exit a position prematurely, missing out on potential profits. On the other hand, greed can lead to overtrading and taking excessive risks. By being aware of these emotions, traders can develop strategies to mitigate their effects and make more rational decisions.
3. Common Psychological Pitfalls in Trading
Several psychological traps can hinder a trader's success. One common pitfall is the fear of missing out (FOMO), which can cause traders to enter trades impulsively without proper analysis. Another is the sunk cost fallacy, where traders hold onto losing positions hoping they will eventually turn profitable, instead of cutting their losses. Overconfidence can also be detrimental, leading traders to underestimate risks and overestimate their market knowledge. Recognizing these pitfalls is the first step towards avoiding them.
4. Strategies to Improve Trading Psychology
Developing a robust trading plan and sticking to it is one effective strategy to improve trading psychology. A trading plan outlines entry and exit points, risk management rules, and criteria for trade selection, helping traders stay disciplined. Mindfulness and stress management techniques, such as meditation and deep breathing exercises, can also help traders maintain emotional balance. Keeping a trading journal to record trades and emotions experienced during those trades can provide valuable insights and help identify patterns that need addressing.
5. The Role of Continuous Learning
Continuous learning and self-improvement play a significant role in mastering trading psychology. Engaging in regular education through books, webinars, and courses can enhance a trader's knowledge and confidence. Additionally, joining trading communities and seeking mentorship can provide support and feedback, helping traders stay motivated and focused. Embracing a growth mindset, where failures are seen as learning opportunities, can foster resilience and long-term success.
🔷 Conclusion
Trading psychology is an integral part of successful trading. By understanding the impact of emotions on trading decisions and implementing strategies to manage them, traders can improve their performance and achieve their financial goals. Recognizing common psychological pitfalls and committing to continuous learning are essential steps towards mastering the mental aspect of trading.
RISK MANAGEMENT IN TRADINGRISK MANAGEMENT IN TRADING:
Why It's More Important Than Win Rate
🔵 INTRODUCTION
In the world of trading, many newcomers fixate on finding the "perfect" strategy with the highest win rate. However, experienced traders know a secret: risk management is the real key to long-term profitability. In this post, we'll explore why managing your risk effectively is more crucial than your win rate, and how it can make the difference between success and failure in your trading career.
🔵 UNDERSTANDING RISK MANAGEMENT
Risk management in trading refers to the process of identifying, analyzing, and accepting or mitigating the uncertainties in investment decisions. It's about protecting your trading capital from excessive losses and ensuring you can survive to trade another day.
Key concepts in risk management include:
Position sizing: Determining how much of your capital to risk on each trade
Stop-loss orders: Predetermined points at which you'll exit a losing trade
Risk-reward ratio: The potential profit of a trade compared to its potential loss
Diversification: Spreading risk across different assets or strategies
Effective risk management is like wearing a seatbelt while driving. It won't prevent accidents, but it can significantly reduce the damage when they occur.
🔵 THE MYTH OF WIN RATE
Many novice traders believe that a high win rate is the holy grail of trading. After all, if you're winning most of your trades, you must be making money, right? Not necessarily.
Consider this example:
Over 100 trades:
Trader A: (90 x $100) - (10 x $1000) = $9000 - $10000 = -$1000 (Loss)
Trader B: (40 x $300) - (60 x $100) = $12000 - $6000 = $6000 (Profit)
This demonstrates that a high win rate doesn't guarantee profitability if your risk management is poor.
🔵 HOW RISK MANAGEMENT CONTRIBUTES TO PROFITABILITY
Effective risk management contributes to profitability in several ways:
1. Capital Preservation: By limiting losses on each trade, you ensure that you don't deplete your trading capital during inevitable losing streaks.
2. Maximizing Gains: Proper risk management allows you to size your positions appropriately, maximizing gains when your analysis is correct.
3. Emotional Stability: Knowing that your risk is controlled reduces stress and emotional decision-making, leading to better trading choices.
4. Consistency: A solid risk management strategy provides a structured approach to trading, leading to more consistent results over time.
🔵 RISK-REWARD RATIO
The risk-reward ratio is a fundamental concept in risk management. It compares the potential profit of a trade to its potential loss. For example, a risk-reward ratio of 1:3 means you're risking $1 to potentially make $3.
Here's why it's crucial:
A favorable risk-reward ratio allows you to be profitable even with a lower win rate.
It forces you to be selective with your trades, only taking those with the best potential outcomes.
Example:
(40 x 2) - (60 x 1) = 80 - 60 = 20 (units of profit)
🔵 RISK-REWARD AND WIN RATE CHEATSHEET
Understanding the relationship between risk-reward ratios and win rates is crucial for long-term profitability. Here's a quick reference guide to help you visualize how different combinations affect your overall results:
1:1 Risk-Reward Ratio
- Breakeven Win Rate: 50%
- To be profitable: Win rate must exceed 50%
1:2 Risk-Reward Ratio
- Breakeven Win Rate: 33.33%
- To be profitable: Win rate must exceed 33.33%
1:3 Risk-Reward Ratio
- Breakeven Win Rate: 25%
- To be profitable: Win rate must exceed 25%
1:4 Risk-Reward Ratio
- Breakeven Win Rate: 20%
- To be profitable: Win rate must exceed 20%
Key Takeaways:
Higher risk-reward ratios allow for profitability with lower win rates
Consistently achieving risk-reward ratios above 1:3 can lead to substantial profits even with win rates below 50%
Always consider both win rate and risk-reward ratio when evaluating a trading strategy
Remember: A high win rate with poor risk management can still result in overall losses
Use this cheatsheet as a quick reference when planning your trades and assessing your overall trading strategy. It reinforces the importance of maintaining favorable risk-reward ratios in your trading approach.
🔵 MATHEMATICAL DEMONSTRATION
Let's look at a more detailed example to show how risk management impacts profitability:
Scenario 1 (Poor Risk Management):
Win Rate: 60%
Risk per trade: 5% of capital
Reward per trade: 5% of capital
Starting Capital: $10,000
Number of trades: 100
Result after 100 trades:
60 winning trades: 60 x ($10,000 x 5%) = $30,000
40 losing trades: 40 x ($10,000 x 5%) = $20,000
Net Profit: $30,000 - $20,000 = $10,000
Ending Capital: $20,000
Scenario 2 (Good Risk Management):
Win Rate: 40%
Risk per trade: 1% of capital
Reward per trade: 3% of capital
Starting Capital: $10,000
Number of trades: 100
Result after 100 trades:
40 winning trades: 40 x ($10,000 x 3%) = $12,000
60 losing trades: 60 x ($10,000 x 1%) = $6,000
Net Profit: $12,000 - $6,000 = $6,000
Ending Capital: $16,000
Despite a lower win rate, Scenario 2 still results in significant profit with much lower risk to the trading account.
🔵 PRACTICAL TIPS FOR IMPLEMENTING RISK MANAGEMENT
1. Always use stop-loss orders: Determine your exit point before entering a trade and stick to it.
2. Follow the 1% rule: Never risk more than 1% of your trading capital on a single trade.
3. Calculate position sizes based on your stop-loss: Adjust your position size so that if your stop-loss is hit, you only lose the predetermined amount.
4. Maintain a favorable risk-reward ratio: Aim for a minimum of 1:2, preferably 1:3 or higher.
5. Diversify your trades: Don't put all your capital into one trade or one type of asset.
6. Keep a trading journal: Track your trades to identify patterns and areas for improvement in your risk management.
🔵 CONCLUSION
While a good win rate is certainly desirable, it's clear that effective risk management is the true foundation of trading success. By focusing on controlling your risk, you can achieve profitability even without an exceptionally high win rate.
Remember, the goal in trading isn't to be right all the time—it's to be profitable over time. Prioritize risk management in your trading strategy, and you'll be well on your way to long-term success in the markets.
Take action now: Review your current trading approach and assess how you can improve your risk management strategies. Your future trading self will thank you!
HGINFRA - Flag & Pole patternAll details are given on chart. If you like the analyses please do share it with your friends, like and follow me for more such interesting charts.
Disc - Am not a SEBI registered analyst. Please do your own analyses before taking position. Details provided on chart is only for educational purposes and not a trading recommendation
Asymmetric Risk Reward: The Secret to Success in Trading?Be as bold as you want yet protect your capital with the asymmetric risk reward strategy — an approach adopted by some of the greatest market wizards out there. In this Idea, we distill the concept of asymmetric bets and teach you how to risk little and earn big. Spoiler: legendary traders George Soros, Ray Dalio and Paul Tudor Jones love this trick.
Every trade you open has only two possible outcomes: you either turn a profit or make a loss. Perhaps the greatest thing you can learn about these two outcomes is the balance between them. The fundamental difference between making money and losing money — the mighty risk-reward ratio .
The risk-reward ratio is your trade’s upside relative to the downside you baked in (or realized).
Let’s Break It Down 🤸♂️
Most traders believe that you have to take huge risks to be successful. But that’s not what the big guys in the industry do with the piles of cash they’ve got. Instead, they try to take the least amount of risk possible with the most upside. That’s what asymmetric risk-reward ratio means.
Think of it this way: you invest $1 only if you believe you can ultimately make $5. Now your risk-reward ratio is set at 1:5, or a hit ratio of 20%. Safe to say that you’ll likely be wrong lots of times. But step by step, you can risk another dollar for that $5 reward and build up a good track record or more wins than losses. That way you can be wrong four times out of five and still make money.
Let’s scale it up and pull these two further apart. Let’s say you want to chase a juicier profit with a small risk. You can pursue a risk-reward ratio of 1 to 15, meaning you risk $1 to make $15. The odds are very much in your favor — you can be wrong 14 times out of 15 and still break even.
What Does This Look Like in Practice? 🧐
Suddenly, the EUR/USD is looking attractive and you’re convinced that it’s about to skyrocket after some big news shakes it up. You’re ready to ramp up your long position. Now comes decision time — what’s a safe level of risk relative to a handsome reward?
You decide to use leverage of 1:100 and buy one lot (100,000 units) at the price of $1.10. That means your investment is worth €1,000 but in practice you are selling $100,000 (because of the leverage) to buy the equivalent in euro. In a trade of that size one pip, or the fourth figure after the decimal (0.0001), carries a value of €10 in either direction.
If the exchange rate moves from $1.1000 to $1.1100, that’s 100 pips of profit worth a total of €1,000. But if the trade turns against you, you stand to lose the same amount per pip. Now, let’s go to the practical side of things.
You choose to widen the gap between risk and reward and aim for profit that’s 15 times your potential loss. You set your stop loss at a level that, if taken out, won’t sink your account to the point of no return. Let’s say you run a €10,000 account and you’ve already jammed €1,000 into the trade.
A safe place to set your stop loss would be a potential drawdown of 2%, or €200. In pip terms, that’s equal to 20 pips. To get to that 1:15 ratio, your desired profit level should be 300 pips, aiming for a reward of €3,000.
If materialized, the €3,000 profit will bump your account by 30% (that’s your return on equity), while your return on investment will surge 200%. And if you take the loss, you’d lose 2% of your total balance.
It’s How the Big Guys in the Industry Do It
You’d be surprised to know that most of the Wall Street legends have made their fortunes riding asymmetric bets. Short-term currency speculator George Soros explains how he broke the Bank of England with a one-way bet that risked no more than 4% of his fund’s capital to make over $1 billion in profits.
Ray Dalio talks about it when he says that one of the most important things in investing is to balance your aggressiveness and defensiveness. “In trading you have to be defensive and aggressive at the same time. If you are not aggressive, you are not going to make money, and if you are not defensive, you are not going to keep money.”
Paul Tudor Jones, another highly successful trader, spotlights the skewed risk-reward ratio as his path to big profits. “5:1 (risk /reward),” he says in an interview with motivational speaker Tony Robbins,” five to one means I’m risking one dollar to make five. What five to one does is allow you to have a hit ratio of 20%. I can actually be a complete imbecile. I can be wrong 80% of the time, and I’m still not going to lose.”
What’s Your Risk-Reward Ratio? 🤑
Are you using the risk-reward ratio to get the most out of your trades? Do you cut the losses and let your profits run by using stop losses and take profits? Share your experience below and let’s spin up a nice discussion!
Market Overview part 34Me Going Over My Full Strategy In Deep Detail In All The Trades Im Going To Trade And Not Trade!
Market Overview Part 33!Me Going over My Full Robin Trap Strategy In Deep Detail! And How Many Trades Im In Right NOW!
Did You Catch the XAU/USD Short? 300+ PIPS!We shared this idea from Asia Session and London Session this morning! Did you get involved with this idea and did you happen to see our walk through? Leave a comment down below and be sure to check out the Idea.
Gold Trading Alert: Major Move on XAUUSD – Don't Miss Out!Key Levels and Patterns:
Higher Highs (HH) and Higher Lows (HL):
The chart shows a series of higher highs (HH) and higher lows (HL), indicating an overall uptrend. This pattern suggests that the bullish momentum is still in play.
Ascending Channel:
There is a well-defined ascending channel where the price has been moving upwards within parallel trendlines. This channel can act as a guide for potential support and resistance levels.
Reversal Points (LQZ):
1-Hour LQZ / Reversal Point: Located at 2,429.190. This level is a potential area where price may reverse or find support.
4-Hour LQZ / Reversal Point: Located at 2,391.394. This level also serves as a significant support zone.
Take Profit (TP) Levels:
TP 1: 2,319.385
TP 2: 2,288.085
TP 3: 2,265.369
Recent Price Action:
The price recently reached a higher high at around 2,458.755 and then pulled back slightly, indicating a potential short-term correction within the overall uptrend.
The ascending channel suggests that if the price remains above the lower boundary of the channel, the uptrend is likely to continue.
If the price breaks below the 1-hour LQZ / Reversal Point at 2,429.190, it could test the 4-hour LQZ / Reversal Point at 2,391.394. A further breakdown below this level might lead to the next support at TP 1.
Analysis Summary:
Bullish Scenario: The price could bounce from the current levels or the lower boundary of the ascending channel, aiming for new highs. Traders might look for buying opportunities near the support levels of the channel and reversal points.
Bearish Scenario: If the price breaks below the identified reversal points and the ascending channel, it might signal a deeper correction, potentially heading towards the TP levels for possible buying opportunities at lower prices.
Gold Price Set to Explode? Must-See Analysis Inside! [Update]Trade Update: XAUUSD Analysis
Date: July 17, 2024
In our previous post and video, we discussed how to approach XAUUSD given the current market conditions. Let's dive into the latest developments and analyze the chart for further insights.
Key Observations:
Break Above HTF Trendline:
We observed a significant break above the Higher Time Frame (HTF) trendline. This move indicates a strong bullish momentum, suggesting that buyers are in control.
After the breakout, the price pushed back into the structure, which is a common retracement behavior. This retracement offers a potential entry point for those looking to capitalize on the upward momentum.
Support Zone Tested on LTF:
The price action tested a support zone on the Lower Time Frame (LTF). This support zone held well, providing a solid foundation for the next leg up.
This test reinforces the strength of the support level and can be seen as a bullish signal.
Current Market Conditions:
Currently, XAUUSD is displaying a textbook play back into an area where we might see signs of either reversal or continuation.
Traders should watch for key signals at this level to determine the next move. A strong bullish reaction could indicate continuation, while a bearish signal might suggest a potential reversal.
Liquidity Zones and Reversal Points:
The chart highlights two significant liquidity zones (LQZ) and potential reversal points:
1HR LQZ/Reversal at 2429.940
4HR LQZ/Reversal at 2391.394
These zones are critical levels to monitor as they can provide valuable insights into market sentiment and potential turning points.
Conclusion:
As the price approaches these key levels, traders should remain vigilant for confirmation signals.
If the price respects the support zone and breaks higher, it could provide a good opportunity for a long position.
Conversely, if the price shows signs of weakness, it might be prudent to consider short positions or wait for further confirmation before making a move.
Stay Updated:
We will continue to monitor the price action closely and provide updates as the situation evolves.
Unlock the Secrets: Is GOLD the Ultimate Trade Today?Unlock the Secrets: Is GOLD the Ultimate Trade Today?
In this episode, I dive into the current conditions of the gold market, providing a comprehensive breakdown on how to form an objective opinion. Drawing inspiration from "Market Wizards" and "Trading in the Zone," I share insights from legendary traders who emphasize the importance of patience and discipline in trading.
Learn essential lessons on patience, understanding that you don't need to force trades or impose your personal bias on the market. Discover why it's perfectly fine to skip trades daily or even weekly if the market doesn't align with your setup. Mark Douglas, in "Trading in the Zone," highlights the significance of a trader's mindset and how maintaining an objective perspective is crucial for consistent success.
I also share valuable advice on productive activities to engage in while waiting for the right trade opportunities. Just as the great traders in "Market Wizards" stress, sometimes the best trade is no trade at all. Use this time to refine your strategies, study market patterns, and enhance your trading skills.
Remember, running in place won't get you anywhere—focus on strategic moves to elevate your trading game. By incorporating these principles and understanding the psychological aspects of trading, you'll be better equipped to navigate the complexities of the gold market.
EURUSD : Short with Small Amount
Position Size : %3 (3 unit)
Leverage : 33x
Stop - Loss : 1.08659
Take - Profit Lvl : 1.05963
Regards.
Growing Small Accounts Without High Risk### Growing Small Accounts Without High Risk
#### What to Avoid:
Do not rush to make massive gains in either pips or % returns.
Do not open yourself to large risk in hopes of equally large returns or profits.
Do not assume taking small risk-defined trades will not grow your account.
Do not sacrifice trading equity due to poor planning or lack of planning.
#### What to Aim For:
Determine how to realistically anticipate a favorable reward-to-risk model.
Learn to respect the risk side of trade setups more than the reward.
Identify trade setups that permit three reward multiples to one risk or higher.
Frame good reward-to-risk setups that have little impact if unprofitable.
### The Reality of Reward to Risk Ratios
| Winrate | Minimum Ratio |
|---------|---------------|
| 75% | 0.3 : 1 |
| 60% | 0.7 : 1 |
| 50% | 1 : 1 |
| 40% | 1.5 : 1 |
| 33% | 2 : 1 |
| 25% | 3 : 1 |
If your winrate is 50%, you only need 1:1 Risk to be profitable.
Price Discount in USD/JPY - Trend ContinuationThe market is a discounting mechanism. When prices rise too high, buyers start taking profits, aiming to buy at lower prices during an uptrend. This behavior sustains the trend.
In USD/JPY, this concept is evident. The swing low at 160.26 attracted strong buyers, pushing the price above the previous high, creating a new higher high. At this peak, buyers no longer saw value and took profits, seeking a discount to buy at a lower price.
Fibonacci retracement is useful in trending markets, as its key ratios indicate potential levels of trader participation. Currently, the price has been discounted to the 76.4% retracement level of the rally. The corrective ABC pattern brought the price from the high to the current discount.
Based on this scenario, we expect more buyers at this higher low, pushing the price above the recent high. Using Fibonacci as a target tool, we anticipate the price reaching at least the 123.6% level of the current rally.
The risk in this trade is if the swing low of 160.26 is broken, buyers won't be profitable, so this level will be our stop loss. The risk/reward ratio for this trade is 7.05.
Always think in probabilities.
EGLDUSDT | Ready for Another Surge?Market Context
EGLDUSDT has been on a fantastic upward trajectory, and it looks like the momentum might continue! This could be a golden opportunity for a quick trade with an impressive risk-reward ratio of 4.5:1.
Chart Analysis
• Strong Upward Movement: EGLDUSDT has been climbing steadily, showing strong bullish momentum that could push it even higher.
• Bullish Indicators: Various technical indicators are aligning to suggest that this upward movement has the potential to continue.
Strategy
I’m diving in with a trade aiming for a 4.5:1 risk-reward ratio. This setup is all about capturing the next leg up in EGLDUSDT’s bullish run.
Action Plan
Setting my entry and watching closely. If EGLDUSDT keeps up its current pace, we could see some exciting gains. Buckle up and let’s ride this bullish wave together!
Good luck, everyone! 🚀💪
KOG - "Fail to plan, plan to fail" Traders,
The market is designed to confuse retail traders, the reason for that is they know 95% of you enter these markets with no plan. You’re not aware of the levels, you’re not charting the pairs you trade, and you lack the basic skills to manage your money and your risk. You need to have a plan before you enter a trade, you need to have a strict set of rules, and everything should line up as much as possible before you take the entry. By the time new traders understand they need a plan, they’ve blown their accounts and blame the markets.
Every trader, before they start their day needs to have a strict set of rules they abide by before entering the markets for a trade. There are many variations and most will have their own rules, but to start you off here are a few we set out for our traders. They're not uncommon, simple steps to take to keep you safe in the markets.
Is the market ranging or trending?
We have to adapt our trading style in accordance with what the market is doing. If it’s a trending market, we know we have a clear direction on the pair and we know the levels of the trend as well as the levels that are provided. We then add the target to this and now have a clearer understanding of where price may support or resist before continuing the trend. When the market is ranging, we adapt our trading style knowing that we’re going to experience a lot of choppy price action as well as extreme up and down swings. We plot the range, we add the levels, and we now have a clearer understanding of support and resistance as well as the range high and low. When the range breaks and confirms the break, you know whether you should be entering or getting out of a trade. Holding on to hope will kill your account and you will then blame the market.
Are there key levels above or below?
Key levels on a chart are really important to understand. You need to add the levels on the long term charts and the levels on the short term charts. This gives you an idea of where price may go before it either supports or resist the price. It also tells you whether price is going to continue in the direction if the key level breaks and the turns into either support or resistance. You can now plan, if the price continues into that level how much will my account be in drawdown, will I be able to hold, do I need to hedge, should I take the loss and switch direction. Holding on to your bias and hope will very likely kill your account, you’ll then blame the market.
How much capital am I risking?
You need to treat this as a business, no matter what your account size. Every day there are large institutions who want to take your money away from you, you’re in this market to take from them and give them as little as possible. You should have a risk model in place, am I going to risk a certain percentage of my account? Am I going to stick to a stop loss of a certain amount of pips? Am I going to have a risk reward that makes sense? Your stop loss and risk management plan is your best friend in this market, it allows you to limit the losses and live to trade another day. It also allows you to trade with a fresh mind everyday because you’re not holding on to hope. Traders fail because they don’t have a risk model, they then get stuck in a drawdown which doesn’t allow them to trade because they’re waiting the entries that are in drawdown to come back into the price range. Cut your losses early, if you’re wrong you’re wrong, don’t let your ego right checks your butt can’t cash! Holding on to losing trades with no risk model will likely blow your account, you’ll then blame the market.
Are there any new events?
News events can move the markets in a very aggressive way but will move the price into the levels that you should already have added to your charts. News brings volume and a lot of traders will use this to their advantage to either scalp or to get good entries on the pairs they trade. It’s best practice to not trade before the news releases unless you’re already in the right way of the market. “The trade always comes after the event”, wait for the price to be taken to the level they want to either buy and sell, wait for a confirmed reversal on the smaller time frames, once everything lines up, then look to take an entry. Trading news events comes with years of practice, it also takes a lot of discipline and the ability to manage risk, not only that but you have to be willing to switch your bias in an instance if you get it wrong. Most traders lack this experience, trade news events like it’s a normal day on the markets and then blow their accounts in one hit, you’ll then blame the market.
Am I following my trading plan?
“Fail to plan, plan to fail”. As above, you need to plan every single trade you take, make sure the market conditions are in your favour, make sure the price is at the right levels, make sure your risk model is in place, make sure you’re aware of the risks involved if it doesn’t go your way. By doing all of this and making a plan, you know what the worst case scenario will be, by knowing that you’re emotions and psychology won’t be affected that much and you will build your confidence. You’ll then develop your strategy and you’ll have a better understanding of what kind of ROI you can consistently make in the markets. Have the discipline to follow your plan and stick to it like a you’re a robot. Get used to taking losses, this is part of the game you’re in. Your wins just need to be bigger and you’re on your way to becoming a consistent trader. Most traders don’t follow their plan, they then blow their accounts and you’ll blame the market.
Hope this helps at least some of you stay the right side of the markets and we wish you the very best in your trading career.
As always, trade safe.
KOG
ARBITRUM Triple Bullish Signal!Arbitrum has seen a significant drop in value over the last few weeks, just like most other alts.
Since ARB is one of the newer alts on Binance, it has an above average growth path ahead of it.
Today I found 3 different "indicators" signaling a potential long-term bottom is in:
- Daily RSI has hit oversold
- Dotted purple support has held
- Bullish divergence on the daily RSI
A single indicator would be tricky to trade, but since all 3 are showing that this might be a great entry for a reversal I'm willing to take the bet.
Stop below the support, target around the current all-time highs.
TRADING TIPS That SERIOUS Traders Know ( ͡° ͜ʖ ͡°)Trading can be like... following a diet🥨
You need a clear plan, but also some space for cheats. If you're prone to jump-in trading, have some funds available for it - trading should be fun! Take that risk. But plan for it. If you've spent your 10% high risk capitol for the month/quarter, then that's that.
- Look for Fractals
Fractals in higher timeframes such as the weekly are often reliable, as it points towards the cyclic nature of the market.
How did I make +118% on SOL? By following a fractal from the previous bull market:
- Learn Elliot Wave Theory
From the DOGE chart, we can see that Point 5 is not going to happen. (not that it won't happen at all, but just that it won't happen for the short term). How do I know this? ...Elliot Wave Theory. The EWT tells us that if point 4 retraces beyond point 1, the bullish impulse is invalidated. We are now more likely to slow bleed down to Point 2.
- Look for Reliable Patterns
Sometimes, certain patterns can be seen moments before they are finally "finished" forming. It's important to know the rules of these patterns, and trade reactively.
I knew where to short ETH. How did I know? The M-Pattern:
Deep Dive guide on Pattern-Trading here:
- Learn to Manage Risk with Leverage
Let's not duck around - Trading is risky but crypto trading is VERY RISKY. Make sure you have a strategy.
- Learn To Trade the Rotations
There's a secret pattern in the relationship between Bitcoin, Bitcoin Dominance and altcoins by market cap. Make sure you understand it before you take a leveraged trade:
- Pick a few Technical Indicators and STICK TO THEM
It's tempting to use whatever new indicator is the flavor of the day... but how will you ever learn the secrets? Technical indicators have "secrets". They look different on different markets. For example, SOL can be "Extremely Overbought" without correcting much for an extended period of time, where as Bitcoin usually corrects when the "Extremely Overbought" signal flashes. (This is an observation from using one indicator on many charts).
Personally, I love Bollinger Bands, Moving averages and Cryptocheck START V3.5 as my combo indicator.
That's how I called the beginning of the new Bullish season in November 2023:
It's important to note that none of these strategies are 100% fail proof. Even the best Wallstreet traders average on 58% per annum.
Stop trying to follow people who claim to make +1000000....% per annum. Often, these guys have lots of money to lose, in other words it's more a fly-by-night than studying charts for consistent wins.
As long as you're making more than interest rates from a fixed deposit at the bank - you're winning!
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