#204: How Important Are High Reward:Risk Trades?
In this video:
00:25 – Should you aim for lots of small gains or target the homeruns?
01:05 – How do I get an 80% win rate?
01:46 – The solution is to trade higher time frame charts
02:28 – Place you stop loss for a reason
03:21 – Forget about making pips
05:00 – This shows how very important high reward:risk trades are to your trading success
06:12 – Black Friday 2016 sale
How important is it to look for high reward risk trades as a Forex trader and how does that impact your overall profit? Let's talk about that and more right now.
Hi Forex traders, Andrew Mitchem here, the owner of the Forex Trading Coach. Today is video and podcast number 204.
Should you aim for lots of small gains or target the homeruns?
And, I want to talk about a really important subject. I've had an email come through here from Robert over in the US and Robert said to me, “Andrew look, I keep getting told to go for small incremental gains per day instead of hitting the home runs.” I can tell Robert's from the US because he mentioned home runs and he said, “I apologize for not using cricket terminology.”
He said to me, “Look, I keep doing this and the problem is that where I put my stop loss, it doesn't allow me a favorable reward to risk, so therefore I'm making lots of small gains and getting a few losing trades and of course the losing trades out do all the gains you made.”
How do I get an 80% win rate?
It's quite a common problem. I get people who say to me, they say, “Andrew, how can I get an 80 percent win rate, a strike rate people like to call it, within my trading?” Well, why do you want to achieve an 80 or 90 percent win rate?
Yes, on paper it sounds fantastic to get all these winning trades, but the reality is, if you have a system like that, in most cases you're going to find that if you have that one or two losing trades, especially if you get them back to back, that it wipes out all your gains that you just made and Robert was finding exactly the same problem from the advice that he was given. He said to me, “Hey Andrew, look can you give me some new advice, I suppose, or what's your take on this? How do I overcome the problem?”
The solution is to trade higher time frame charts
To me the answer is generally to get onto the slightly long timeframe charts. I find that generally the higher the timeframe chart, the higher the reward to risk I can get off of those charts and off of those trades. There are several reasons. Spread really doesn't pay much of a, it plays very little importance on a longer timeframe chart. Of course, if you're taking trades all the time on five or 15 minute timeframe charts, spread can soon eat into your profits but if you were taking trades you know, like maybe one or two trades a day on a longer timeframe chart, spread really isn't that sort of significant a factor really.
Place you stop loss for a reason
If you have a longer timeframe chart, you can generally place your stop loss for a safety level, at where it should be for a reason, not just because it's X number of pips away. On most cases that is a very, very bad way of trading because if you pick 50 pips, as an example, 50 pips on the euro/US is completely different to 50 pips on the euro/yen or 50 pips on the euro/franc even. You get pairs that move a lot and you get pairs that move a little bit. Picking the same pip stop loss is not a great way of trading and of course different timeframes require different levels.
I like to say, let's put your stop loss at a level that if that stop loss gets stop out, you accept you got the trade wrong, the market went against you, whatever the reason but you accept that you lose on that trade.
Forget about making pips
If you forget about making pips and make that a percentage of your account if it gets stop out, that also helps you. The important thing is to try and look for trades that have a safe level for a stop loss and also give you plenty of upside potential.
Now if I'm trading on four hour charts or six or 12 or daily or weekly, generally as I get higher timeframes then generally the reward to risk gets higher, but I like to look for trades that have a two to one reward to risk right through to some trades have up to a five to one reward to risk. Most would be between a two and a three to one reward to risk, most trades that I take, so that means that if I'm risking half of one percent of my account on any one particular trade, if I get stop out, I'll lose half of one percent. If I have a two to one reward to risk trade, I make one percent if it hits the full profit.
If it's a three to one, I make one and a half percent gain. If it's a four to one reward to risk trade, I make two percent gain by risking half a percent. You can see in that case, with a four to one trade, I could lose let's say three trades and I'd lose one and a half percent total, yet my fourth trade is a winning trade and I make two percent, so therefore I‘m net plus point five percent. That example is only with a 25 percent win rate. Now of course I like to get a higher win rate than that, but you can see in that example you‘re losing 75 percent of the time, but you're still making money.
Yet you get people who win 75 percent of the time or higher, and they lose money.
This shows how very important high reward:risk trades are to your trading success
You can see how very, very important high reward to risk trades are. To answer your question Robert, it's generally, a suggestion from me would be to go onto the higher timeframe charts. You see, you can't trade a 15 minute timeframe and put a small stop on there and aim for this massive reward. Sometimes yes you will get there, but not that often because the shorter the timeframe, the more the noise, the more the up and down movement within the price.
To go and pick the absolute top or absolute bottom and have your stop loss at that perfect level and your profit target at that perfect level and get that perfect move, the shorter timeframes, it's very hard to do that consistently. Whereas the longer timeframes you accept you're in the trade for longer, you have news events going on, you have your trade in potentially overnight. You have all sorts of things happening within different trading sessions but because you've got a bigger stop loss, you give that trade and that overall longer term trend time to get to your profit target.
It's a lot less stress involved, it's a lot higher reward to risk, which generally means you make more money and ultimately that's what we're trying to do. I hope that helps answer your question there Robert.
Black Friday 2016 sale
One last final thing, this Friday I'm holding a Black Friday sale. If you'd like to get in and have access to my course at exceptionally low rate, click on the link below this video and I'll have a link there that will take you through to the Black Friday page. It's only a 48 hour sale.
It's pretty much, I've been looking at just the US and Canadian traders because it's, Black Friday is generally something that affects people from those countries but it's available to anybody. Wherever you are in the world, if you're interested in getting a great deal and having a Black Friday deal, a special way of getting on to my course at a massively discounted rate, click on the link below this video and it will be this Friday.
Have a great weekend, see you next week.