Risk & Reward
RISK & REWARD are directly connected but inversely related to the win rate; the greater the Risk Reward the lower the win rate.
Due to fee's & commissions, there has to be an additional 2 points difference between the profit target & the stop loss for a 1:1 trade.
1 to 1 RR is acceptable
1 to 2 RR is common
1 to 3 is great
We Will ALWAYS use a stop. There will NEVER be a trade with a large loss; this is the only thing we can control.
Risk and Reward
What is your "avg" stop size?
Different markets require a different stop size
Different traders require a different stop size
Different times in the trading day require a different stop size
Ready to "Go Live...?"
Set your goals
Adjust your goals
Improve on those goals
Do the Math
What is the "common" or average size of the winning trades you've taken?
What is the "common" or average size of the losing trades you've taken?
What is your average win rate?
Get the Stats
Take the Avg Win (W) and the Avg Loss (L) and the Win Rate (WR) from earlier and run the numbers.
TT = Total Trades
W = Wins
L = Losses
AW = Avg Winner
AL = Avg Loser
hRR = Historic Risk Reward
First calculate the win rate. (W/TT)
Then calculate the hRR. (AW / AL)
Now answer the question - are the current stats sustainable? If you were to increase the total number of trades 100% - are you in the red or in the green?
Adjusting the Outcome
Decrease the total number of trades
Decrease the total loss (avoidance)
use a smaller stop
hit a higher profit target
Consider the idea that there are only "x" number of trades each day; if we wanted to increase the win rate it has to come from decreasing the losses - not from getting "more winning trades" and this is due to the "x" number of trades logic.
For example, suppose we were to review the last 10 trading days and look at the potential trades offered. We find an average of 10 acceptable trades a day.
Remember how we calculate the win rate...? We take the total number of winners and divide by the total number of trades taken. (W/TT). If we had 3 solid wins and 4 "decent" wins and 3 loss... the win rate would be
7/10 = 70% win rate.
If we can't "win more" trades (because we only found 10 trade setups a day on average) then how can we increase the win rate? By eliminating the losses and taking less trades. Suppose we eliminate 2 of the losses by recognizing that they were taken during "no trade times" of the day and we eliminate 3 "decent" trades by recognizing they were taken off minor pivots during "less good trade times" and "no trade times."
Now we've eliminated 5 of the 10 trades taken and the new numbers are 3 solid winners, 1 decent winner (4 total wins) and 1 losing trade. we calculate the win average (W / TT) = 80%
Change the Stats
Obviously - the example above was simplistic but hopefully it sets the tone and is a good reminder that "more is not better. "Quality" is far more important than quantity.
Each trade we take is a risk; there is always the risk of news coming in & driving price violently against our stops. Then there is the simple fact that even good setups can fail or fail to really provide a nice follow-through.
Keeping these things in mind - we want to focus on high conviction plays that have the most opportunity to follow-through and eliminate the least likely trades.
We can do this by adjusting when and how we trade; watching the clock gives us a chance to avoid "high volatility" market conditions while also avoiding "on the hour" volatility which can trigger our stops.
Consider the day broken into "zones" - and these "time zones" are shaded by their risk and volatility. RED zones would be "high conviction risk" while green would be "high conviction reward" and then shades of red / green as we move farther away or closer to a red / green zone.
Stops
Stop Loss = To Limit Loss
Stop Profit = To assist with targeted exits
Disaster Stops = To limit "total Loss"
Fading with Stops = To assist with targeted exits