best reward risk Archives

Would you do me a favor? I’m going to stop talking for a moment, and when I do, I want you to imagine taking a long trade on this chart, as soon as you think the price is at a discount. And ask yourself, how much do these indicators affect your decisions, just because they are on the chart. Go ahead.

This is exactly what happened with many traders in February of 2020. In February 2020, the price was at an all-time high, and many traders were looking for a discount. Soon the price gave a big pullback, and by March 2020, many brokers, had a 100% increase in new stock trading accounts. Many of these traders, are in-experienced and are most likely to lose money. I would like you to meet some of these traders and watch very carefully, how an event or a chain of events that follows have a big impact on their lives.

It’s 4th March 2020, and the markets are at a good discount, after making a good move, in the upward direction. The price is near the 200 period moving average, and Bill is about to take a long trade using margin. At the same time, Emma is doing research on the market. She discusses the stock market with her friends, and fears, when a random person on social media, says the stock market is about to crash. Both of these people, are in-experienced in this field and have little idea about what information is right, and where to get it from. Both want to buy the stock market index, in the hope to make a decent profit. Bill buys because he thinks the price is at support, but Emma, decides to take advice from the television, and fears it might be a crash.

By the end of March 2020, the stock market index, was down more than 30 percent from the high. Many traders lost a lot of money, and people like Bill, who went long with margin, blew up their accounts. Since margin is like a loan from the broker, in the wrong hands, margin trading can be quite devastating. By the time Bill had lost everything, Emma had done a little bit of research and was ready to take a position in the market. Since she is not an experienced trader, she too ends up taking a long position, with a high margin.

After April 2020, the Stock Market Index starts moving in the upward direction with good momentum. By December 2021, the price was already up by almost 100 percent. Emma, not an experienced trader, who ended up taking a trade with borrowed money, makes more than 300%, in just around 1 and a half years, something that many traders only dream about. If she had taken the long trade, just 30 days earlier, she would have blown up the account like Bill. Just one month, made a big difference, on how they are going to look at trading in the future.

Even if there was no margin used while taking the trades, both Bill, and Emma, would have been sitting with a profit. However, because Bill bought early, he would have only made a 50% profit. Since Emma bought late, at a better discount, she would have ended up with almost a 100 percent gain.

This raises an interesting question, and it was also asked on the Trading Rush Discord Server. If buying late can make more money, why not take every trade late?

Let me explain that, let’s say, we are using the highest win rate trading strategy, that we have tested 100 times on the Trading Rush Channel. According to the strategy, if we want to take a long position, we have to wait for the long MACD crossover. We have to set the stop-loss below the pullback of the trend, and use a 1.5 to 1, reward risk ratio profit target. But instead of waiting and taking trades when the long MACD crossover happens, why not wait, for the price to move in the opposite direction a little after the entry signal? Let’s say, it has to move 50 percent of the stop loss distance, in the opposite direction. Taking the entry late like this will obviously result in a smaller stop-loss, but that will turn the 1.5 to 1 reward risk ratio, into a 4 to 1 reward risk ratio.

See in trading, the reward risk ratio, and win rate, are inversely related. This means, if you increase the reward risk ratio, the win rate will go down, and if you decrease the reward risk ratio, the win rate will go up.

Since the MACD strategy, with the 1.5 to 1 reward risk ratio, got a 62 percent approximate win rate, the win rate with the 50% late entry, should be lower. However, the counterpoint was, the price after the entry, goes in sideways, and in the opposite direction many times, and on top of that, there is also market noise. So by waiting for the price, to move in the opposite direction after the entry, we will run the risk of missing out on some excellent trades, but if the price, moves in the opposite direction, we get a chance, to make 4 times more profit, than the risk.

In one of the previous videos, I tested the 50% smaller stop loss 100 times. In simple words, I first took the entry, using MACD crossover, with a 1.5 to 1 reward risk ratio. Then, I made the stop-loss 50% smaller. And then I moved the profit target closer, to make it a 1.5 to 1 reward risk ratio trade. But then some of you in the comments mentioned that, if you don’t move the profit target, the 1.5 to 1, reward risk ratio, becomes 3 to 1. If we do this, the profit target of the 50% smaller stop loss, profit target of the 50% late entry, and the profit target of the normal reward risk ratio trade, stay at the exact same place. But all of them will have different profit potentials. Which one of these entry methods, will make more money in the long run? To find the answer, I am going to take 100 trades, with each entry method. Since we already know, MACD on Bitcoin, with a 1.5 to 1 reward risk ratio, gave approximately 62% win rate, I am going to test the other two methods, on that same market structure and same timeframe.

By looking at the reward risk ratio, you probably have guessed which one of these methods will give a higher and lower win rate.

With a higher reward risk ratio, comes a lower win rate. And because of that, we can even guess, the number of winners and losers in a row, the strategy can have. And because of that, we can guess, how much percentage of our account, we can risk per trade, to be profitable in the long run. And most importantly decide, whether or not that strategy fits, with the trader’s personality. If the win rate is low because the reward risk ratio is high, the strategy obviously, is going to have a bigger losing streak. Unfortunately, not everyone can handle losing multiple trades in a row. When a strategy is having 10 losers in a row, believing in that strategy, and the long-term picture can become difficult for many beginners. For them, a higher win rate strategy is more suitable, and you get that higher win rate, by using a smaller reward-risk ratio.

In theory, with 50% late entry, we should be missing out on some trades. And we did. In fact, on the exact same market structure, and by that, I mean where normal MACD and smaller stop-loss found 100 trades, 50% late entry was only able to find 66. Other 34 trades reached the profit target before the price moved in the opposite direction.

Since the 50% late entry, had the highest reward risk ratio, it also had the lowest win rate after 100 trades. And that resulted in the highest number of losing trades in a row. Even though the 50% smaller entry made money. Ask yourself, can you handle losing 20 trades in a row? For most of us, the answer is no. A smaller losing streak is much more preferable.

On the other hand, since the 50% smaller stop-loss, had a smaller reward risk ratio, it had a slightly better win rate and a much smaller losing streak. Surprisingly, 50% smaller stop-loss, made almost the same amount of profit, as the 50% late entry. If they both made pretty much the same amount of profit, is the high reward risk ratio, really worth it, when it makes you sit through a big losing streak?

In the main MACD strategy we saw on the Trading Rush Channel, we use the 1.5 to 1 reward risk ratio in the first place because we found out that it is the best after taking 300 trades. And we use a pullback stop-loss because we have data, that says it’s the best. And if we compare the 50% late entry, and 50% smaller stop-loss, with the main strategy. We can see that the main strategy, not only performs better when it comes to the win rate but also makes way more profit in the long run. In this experiment, it made almost 2 times more money!

Now ask yourself, which one of these strategies, and reward risk ratios would you like to use? As for me, the answer is the smaller reward risk ratio, so I can win trades more frequently, with a strategy, that has a high probability of making money in the long run.

That’s all. Get Trade Alerts, See how I take high win rate trades, and become part of the Discord community by supporting Trading Rush on Patreon. Thanks for watching!

I took 300 Trades to find the BEST Reward/Risk Ratio | 1X vs 1.5X vs 2X Forex Day Trading

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I took 300 trades to find the best reward risk ratio in trading so you don’t have to. Imagine that there is Bill the first who bets that the coin will land on heads. Then there is Bill the second, who bets that coin will land on tails. If the coin does land on the heads, Bill the first receives 10 dollars. And if he loses the bet, Bill the first has to give 10 dollars out of his own pocket.

When they flip the coin, it lands on tails. Since it landed on tails, bill the first has to pay 10 dollars. Bill the first is not going home with a loss, so they flip the coin again, and this time, the coin actually lands on the heads and Bill makes 10 dollars. In this example, Bill the first is risking the same amount that he is going to make if he wins. In other words, the reward risk ratio is 1.

Now, we all know that the probability of a fair coin landing on heads is 50 percent. So in the long run, Bill the first is not losing money, but he is also not going to make money.

Now let’s say the coin is not fair. Let’s say the coin is bent a little, and if you flip it, it has a higher chance of landing on heads. Let’s say the probability of this rigged coin landing on heads is 60 percent. Now if Bill the first bets on heads with a 1 to 1 Reward risk ratio, he will most likely make money in the long run. In this scenario, Bill the First has an edge. Or in other words, Bill the first has a high win rate.

But let’s say he didn’t have an edge. Let’s say it’s a fair coin, the probability of winning is 50 percent. But this time, Bill the first receives 20 dollars if he is right, and if he is wrong, Bill the first only loses 10 dollars. And as you can already tell, in this scenario, Bill the first is most likely going to make a profit in the long run, because he is winning more than the potential risk. In other words, the reward risk ratio is 2 to 1 with a 50 percent win rate.

In the first scenario, the edge was the high win rate. And in the second scenario, the edge was the high reward risk ratio.

In the Forex and Stock Market, we look for an edge that will make us money in the long run. But in reality, Forex and Stock Market are not like a coin toss. Here, if you increase your reward risk ratio, the win rate goes down. And if you try to increase the win rate, the reward risk ratio goes down. But it’s not always that simple. Since the very first video on the Trading Rush Channel, I have been recommending and using a 1.5 to 1 reward risk ratio while testing strategies 100 times. Most trading strategies got a good win rate and made good money after 100 trades. But what would have happened if we had used a 2 to 1, or a 1 to 1 reward risk ratio? Will we make more money if we mess with the reward risk ratios? What is the best reward risk ratio?

To find out, I took 300 trades, and here’s what happened.

If you are a subscriber of the Trading Rush Channel, you probably remember the Schaff Trend Cycle trading strategy. If you come to the Official Trading Rush Website, you will notice that it ranks fifth from the top, just above the Ichimoku Cloud, and below the MACD and Stochastic Trading Strategy.

When I tested that trading strategy 100 times, I took 100 trades with a 1.5 to 1 reward risk. So we have that data, and already know that with a 1.5 to 1 reward risk ratio, the Schaff Trend Cycle Trading Strategy gets approximately a 50 percent win rate, and in the Trading Rush App, it made a profit of 2500. Now keep this number in mind for a moment.

And now, let’s test that strategy again with a 2 to 1 reward risk ratio, and again with a 1 to 1 reward risk ratio, to see if the end profit is more than 2500.

So first, I took 100 trades with the 2 to 1 reward risk ratio, and here’s what happened.

Number 1. Now Schaff Trend Cycle is a profitable trading strategy, so we are expecting the profit graph in the Trading Rush App to go in an upward direction. And as you can see, the profit line made higher swing highs and looked very similar to an up-trending Forex and Stock chart. Since we increased the reward risk ratio, we are expecting the win rate to fall. And as you can see, in the end, the Schaff Trend Cycle with a 2 to 1 reward risk ratio, got an approximate win rate of 42 percent. We will compare and talk about the profit number in a moment.

But now, let’s test the Schaff Trend Cycle strategy with a 1 to 1 reward risk ratio.

This time, since we reduced the profit potential per trade, we are expecting the win rate to increase. The profit graph went in an upward direction, but it was not looking good as the profit graph of the 2 to 1 reward risk ratio. When we took 2 times more profit, the winning trade covered 2 losing trades. But here, since we are winning the same amount as the potential loss, the profit line was going in the sideways direction sometimes. But since we know Schaff Trend Cycle works, we were expecting the overall trend to go up, and it did. The Schaff Trend Cycle with a 1 to 1 reward risk ratio, got an approximate win rate of 55 percent.

And now, if we compare the three reward risk ratios side by side, you will notice that the win rate with a 2 to 1 reward risk ratio was 42 percent, which is 8 percent lower than the win rate we got with the 1.5 to 1 reward risk ratio. And, the win rate with a 1 to 1 reward risk ratio, was only 5 percent higher than the win rate we got with a 1.5 to 1 reward risk ratio.

But that’s not the interesting part! What’s interesting is that the profit with a 2 to 1 reward risk ratio, was only 100 dollars more than the profit made with a 1.5 to 1 reward ratio. But on the other hand, the profit with 1 to 1 reward risk ratio, was only 1000 dollars, which is 1500 dollars less than the profit we made with the 1.5 to 1 reward risk ratio.

So what is going on here? We were expecting the profit to be a little different, but the profit 1 to 1 reward risk ratio achieved is a lot different than we expected.

On paper, we expect the win rate to go down and go up if we increase and decrease the reward risk ratio respectively. But in reality, since most of us trade in the direction of the trend, and since in the previous video, we created the Schaff Trend Cycle strategy as a trend following strategy, what’s happening is, reward risk ratios like 2 to 1 and 1.5 to 1, are more likely to capture that good price move in the entry direction. That’s because, in a trend, the price has a higher probability to keep moving further in the direction of the trend unless there is no roadblock. 1 to 1 reward risk ratio on the other hand, is missing out on these big moves by taking profits off the table early. Remember that all 300 trades were taken on the same market structure. But the 2 to 1 and 1.5 to 1 ratio made money more consistently than the 1 to 1 ratio, and their profits graphs looked very similar.

The 2 to 1 reward risk ratio didn’t make a lot more money than the 1.5 to 1 ratio, was because price doesn’t make a big move every single time.

So what’s the conclusion? If the trend is really strong, or you are expecting a strong move in one direction, it is a good idea to use the 2 to 1 reward risk ratio. If you have doubts about your entry or the trend is not good, it is a good idea to use the 1 to 1 reward risk ratio to increase the win rate. And since the 1.5 to 1 reward risk ratio had a good win rate and made a good profit, it is a good idea to use a 1.5 to 1 reward risk ratio in a good trend.

Now, remember that even though 1 to 1 reward risk ratio didn’t make a good profit in the end, doesn’t mean you should completely avoid it. If you have watched some of the live trading videos or are supporting the Trading Rush Channel on Patreon, you know how I use a lower reward risk ratio like 1 to 1, to increase the chances of winning when the market is not good.

I did a similar test a long time ago, and after finding out that the 1.5 to 1 reward risk ratio is the sweet spot, I have used it to this day. And if you are a subscriber of the Trading Rush Channel, you already know that I have used the 1.5 to 1 reward risk ratio since the very first video on this channel. In fact, I already knew the approximate win rates of most trading strategies I have tested on the Trading Rush channel

because I also tested them many years ago. Except for the Donchian Channel. Donchian Channel Trading Strategy was a surprise. It got a very high win rate of approximately 58 percent, which is very close to the highest win rate trading strategy we have tested.

If you want to see that high win rate strategy or want to see win rates of more trading strategies, subscribe to the Trading Rush Channel and ring the notification bell. After all, you don’t want to risk your money with something that doesn’t work in the long run. Support the Channel on Patreon to get Trade Opportunity Signals, and to see In-Depth Trade Analysis. Thanks for watching.