Understanding Reward To Risk Ratios – October 2016 Trading Results
First of all I have to apologize for getting behind on these videos. I have started producing them in 1080p and wanted to wait to get my new setup before getting these videos current. October 2016 is the 18th video in the month end series and it finished with a +8.5% gain bringing our total compounded gain to +356% on all EUR/USD and GBP/USD trades. This is also based on 2% risk per trade. Its important to note that the DTFL bank trading strategy can be used on any pair and most DTFL members do trade additional pairs in an effort to have more trading opportunities.
One of the most important aspects of becoming a full time forex trader is a positive reward to risk. I’m not saying that you cannot be profitable without a positive reward to risk ratio. What I’m saying is that in my opinion there is nothing more important than reward to risk. We start all of our trades with an initial R/R of 2 to 1. For every dollar we are risking we have the potential to make $2. While initial reward to risk is important, as you all know not all trades hit a full stop loss or take profit. As such it is critical to know what your actual reward to risk is on your closed trades. As an average our closed positions come to 1.6 to 1 which means we could win 40% of our trades and still be profitable. If we win 50% of our trades we make a decent profit and at 60% you have a very nice strategy.
Tony Robbins wrote a book titled Money: Master The Game – 7 Simple Steps to Financial Freedom. I did a post on that book and it was titled Learning From Billionaires – 7 Secrets From Investment Superstars. In that book he interviews some of the greatest financial minds in the world from people like Carl Icahn to Warren Buffet. While they all have different investment strategies, they did all share one thing in common. What was that one thing? Every single one them mentioned the phrase asymmetrical reward to risk. Essentially, for every $1 they risk they want to have the potential to make $3 or $4. If the greatest financial minds in the world, and the most successful investors in the world all share this common belief, then why wouldn’t an average trader like you or I?
If you’re using a in the process of learning to day trade and losing money then I would highly recommend looking at the actual reward to risk of your closed trades. If that number is less than 1 to 1 you have a good starting point from which to turn your trading around. Its also critical to keep in mind that not all day trading strategies are designed or setup to capitalize on reward to risk ratios. This is especially true of the shorter term trading strategies. The DTFL day trading strategy is specifically designed to only get setups where higher reward to risk is likely if the direction is right.
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-Sterling