How to use the Risk Reward Ratio And Probability 🙂
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- Опубликовано: 28 сен 2017
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How To Use the Risk Reward Ratio Like A Professional. www.financial-spread-betting.c... PLEASE LIKE AND SHARE THIS VIDEO SO WE CAN DO MORE You have probably heard of the risk-reward ratio, and maybe even heard advice that says you should have 3:1 or 5:1 reward to risk on any trade you take. On the face of it, that sounds sensible, but if you’re going to win at trading you need to take into account probabilities. OK.
For any trade, if there is no other indication, it’s probably 50/50 whether the price will go up or down. There’s a neutral expectancy. And if you took a trade with a 1:1 risk-reward ratio, you’d finish up even over time (less any fees) and there really wouldn’t be any point.
In the same situation, if you use a risk/reward ratio of 3:1 or 5:1, the chances are that success in the first case would only be 33% of the time and in the second case 20% of the time, again taking a neutral expectancy for the price to go up or down. So again trading would make no sense.
As a trader, you want to stack the odds in your favour. You do this by selecting the trade that you want to make. For instance, you might be looking at a pullback in a rising trend and identifying a low point or support level before the trend continues. If you’ve done your homework and made sure this is the situation, you could reasonably say that the chance that the price will go up is much more than the chance the price will go down. Perhaps there’s a 75% chance of the price rising compared with a 25% chance of the price falling further.
Now, if you place a trade that the price will go up with a risk/reward ratio of 1:1, you will over time make a profit. The price is going to go up three times out of four and only go down once out of four trades, on average, so this is a sensible trade to make.
It’s also possible to look at this from the other point of view. Say you had a risk-reward ratio of 10:1, and estimate that your chance of success in this trade is only 30%, i.e. 70% of the time the trade will fail and you will be stopped out on your stop loss. Would you want to make this trade?
If you’re following along, then you should say of course. I don’t care that my trade fails seven times out of 10 if it succeeds three times out of 10 and each time I win 10 times the amount I lost on each losing trade. I’ve lost seven and won 30 “units” for a healthy profit.
So you see it is not such a simple question as what your risk-reward ratio is to decide whether you want to make a trade. You must take into account the probability of success, that is the probability of either outcome. Successful trading requires that you form an assessment of the market and put the odds in your favour every time you take a trade. You win some and you lose some, but you want probability on your side.
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Great job explaining the big picture of risk reward. 1:1 high probability trade and let half run. Only way i have found to consistently generate nice equity curve. Tried higher reward targeting for years as conventional wisdom demands and found it incredibly frustrating. Nicely done
Well done! Best video I came accross on this subject. Cheers from Brazil!
The best risk reward vs probability video I' ve seen
The real question is what principle methods are reliable for measuring probabilty on any given trade? Wouldn't there have to be tests in place to find information from the set of data collected? How would you decipher this into your trading plan? In other words, what makes you say this will work out 25% of the time? I am trying to understand how I can apply this to options. Using delta to determine the amount of risk on the spread?
Great info and very easy to understand for a newbie, thanks
Good video thanks, all I’ve been looking for.
Great great great great concept liked it very much .... changed the concept of RRR Thanks
Thank you sir
Its a very crucial part of trading methodology no one talks abt😊 thnx fr the knowledge.
Helpful. Keep going.
In many videos about RRR many seem to forget the probability of a trade. Glad you didn’t. If a Forex pair moves 50 pips a day and you want scalp it for 40 pips I think you trade will have a very low probability compared to one going for 10 pips. The session volume profile set to cover 68 percent width of the price would tell you what a high likely trade would be. And exactly based on probability. If a trade would make it 100% for sure you don’t need a stoploss or risk, would be pointless.
This is fantastic.
Great video
Hello,
I entered 1000 USDT in a Crypto pair trade position by a Risk-to-Reward of 2 ;
If it reaches to my take profit/TP, then I will
have 2000 USDT ?
Thanks,
Nice video
Hi why you say 10 to 1 when you mention risk rewards you suppust to say 1 to 10 no?
Wait but how will 10:1 pay you if you’re only winning 30% chance of the trade each time?
Where have you been all my (trading) life?
For example here UKspreadbetting, why the hell I am watching this video while drinking coffee? I perfectly know what he is doing to say! I do it because of that reason: to have MY Mark, not the new one to repeat me things because I am still struggling to take one to one trades, but statistically as I said I should do that because if it confirmed by that right feeling, I have 85-87% of positive outcome... but again: my stupid self-doubts ruin it all!!!
this guy is supper old school, in the way he teaches lol. i've watch more than 200 videos and always uses the board and rarely pc
Lunch time? That is different time all over the world. Should be most valid when trading stocks I guess.
I didn't understand!
RR 1-5 means winning 1 out of 5 so that's 20 wins on 100 trades 20*5=100 80losses*1=80 so 100-80=20 gains?
The problem is ,odds are always the same...There is no expectancy, you never know if there is bottom or top. If you use 1:1 RRR your winning chance will be always 50% +- no matter what you do.
Suuuubed