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How ATR Stop Loss Strategy Can Improve Your Trading?

How Average True Range (ATR) Can Improve Your Trading?

Average True Range known by the acronym ATR is an indicator widely used in technical analysis in financial market analysis and measures volatility in the market. ATR has been introduced by Welles Wilder Jr. in his book New Concepts in Technical Trading Systems.

In this article, we’ll discuss how the ATR can help improve your trading and how to use ATR as a stop loss.

Size/range of the ATR

As the range varies, it is important to take a designated value as a measure of market volatility. For this, the generally accepted practice is to adapt the best of these: current high less the current flow, the current high absolute value less the previous close, and the current absolute value. You need to take the average actual range. It’s more than a moving average. It is determined by using the true range for 14 days.

In this image, we can see on the Daily chart Average true range. As you can see GBPUSD is in rising volatility. Price is going down but volatility is high. It is because of Coronavirus news.

Today, 229 pips are the daily range and a just week ago it was around 80 pips.

Determining ATR

As a trader, you can use a short period of fewer than 14 days to accrue trading signals. This is because longer periods are likely to generate fewer trading signals. Suppose, for example, a short term trader wants to evaluate the volatility of a stock during a five-day period.

The trader could have to estimate the ATR for the five-day period. As prices are arranged on the chronological order, the trader gets the absolute value at the maximum level at the current high minus current low, the absolute value of the current high less the preceding close and the absolute value of current low less preceding close.

Calculating ATR:

Average True range = ATR = MAX (BarHigh, PreviousBarClose) – MIN (BarLow, PreviousBarClose)

Average true range stop loss you can calculate as Daily ATR percentage or Weekly ATR percentage.

By default, ATR indicator settings are 14 days. In trading, some traders use 24 or 30 too.

As an indicator of the absolute size of the trade

What does the ATR tell us about?

The author of the ATR had the intent to measure the volatility in the commodity market widely known for its volatility. However, note that ATR can also be used to measure the volatility and in stocks and indices.

The way it’s used in the stock market is this: when a stock experiences high volatility, it is going to cause a higher ATR. Contrary to this, a low volatility stock assumes a lower ATR.

Market experts may use the ATR as an instrument to influence investors – they can advise the latter to exit trades. They can use it as a useful instrument to add to a trading system.

ATR is a helpful tool for market analysis to more correctly scale the volatility experienced on a daily basis for any asset. This involves using plain calculations.

Be aware that the indicator does not imply the direction price moves. It can show you the amount of volatility as a result of gaps and the limit that the market goes up or down.

It’s also important to note that the ATR is simple to calculate and for this, you need to data on price on a historical basis. The starting step to calculate the ATR is finding a series of true range values for an asset.

Using ATR for exit and entry

The ATR is widely used as exit and entry determiner in markets when making such decisions. A commonly used technique is called chandelier exit invented by Chuck LeBeau’s. The chandelier exit works thus: it reckons a trailing stop according to the highest high the stock reached since you entered the trade.

The gap between the highest high and the stop is equal to multiple times the ATR. Thus, you may subtract ATR three times from the highest high at the start when you entered the trade.

So how we can use ATR stop loss for the forex stop loss indicator?
We can set out a stop loss in the function of ATR.
For example :
You can set 20 pips for stop loss if today is 100 pips average true range. But even better you can do:
Instead of 20 pips you can set stop loss to be 0.2 Daily ATR. So if today is 100 pips range it will 20 pips, but if it is 150 pips range it will be 30 pips stop loss. Your stop loss is following the current market average true range.

So in your forex stop loss indicator, you just need to set stop loss to be as a function from ATR.

The ATR can also help decide how much you should devote to derivative markets. This is important. You can use it to measure the trader’s amount of inclination to embrace risk and the volatility in the market.

ATR can help in day trading

If you use the ATR as a tool in the day intraday trade chart, the ATR is likely to increase steep following the market’s opening. The ATR spurts even at the beginning of the day thanks to the high volatility at the moment. The ATR can show that the volatility was more than the preceding trade day.

Once the ART reaches the maximum level, it progressively declines all day. Of course, the fluctuation in the indicator may not provide any information barring the price and its average value at any minute. Likewise, the ATR can show how much each of your assets moves and its moving trend.

You can use the ATR to determine the price reached by your asset at any minute. Such analysis is helpful in predicting the tendency in the market movement – the probable trend.

How you can use the ATR forex indicator besides entry and target?

The ATR shows the actual movement in price tendencies. To determine the time that price takes to reach profit live, divide the profit you expect by the ATR. So you can connect ATR and profit as well.

As a guide to exit the market

You can use the ATR to leave the market if you find the price of the assets moves against your expectations. It can guide you when you should decide to exit the market.

By this, you can protect yourself against potential loss, by knowing the market movement tendency beforehand.

How it works

You need to take note of the ATR value at the moment. You can find out the suitable limit by just double the ATR. Thus, when you buy a stock that is losing you can arrest the loss at ATRx2. The loss increases and reaches the peak level and stays there until the close of trade because of the drop in price that could impact the stop loss level. For short trades as well, this mechanism works.

Conclusion

The ATR indicator is a great tool that helps traders determine the right amount of money they should devote at the right time. Of course, you should have enough exposure to the market – how to use the tool and the potential impact on the ultimate findings. By using the tool judiciously you can protect your money without having to spend a lot of time that would otherwise you squander. You can, thus, start trader on the day and you can also sense when you should devote more money to the market and you can sense the threatening perception and exit the market.

Understanding Currency Interest Rate Differentials

by Fxigor

The interest rate differential has defined as the difference in the interest rates for each of the two currencies in the currency pair. Each currency has its own interest rate and the difference between the interest rates are the rate differential. In foreign exchange (forex) markets, the differentials or forex interest rate differentials are of interest since they affect the pricing of a particular currency. Purchasing a currency which is having a higher interest rate is profitable, since the trader will get daily interest payments. This forex purchase is defined as carry trade or earning carry on the rate differential. Since 2010, changes in the economies worldwide, have resulted in negative interest rates in some countries and people are more interested in the differentials in interest rate.

For example, you plan to buy or sell the USD/JPY for 2-years. You will either receive 2.68% when you try to buy the dollar or pay away 2.68% if you buy the yen and sell the dollar. This exchange differential exist because the 2-year US rate is 2.50% and the Japanese 2-year yield is -0.18%. If you buy the US dollar and nothing happens for 2-years you will earn 2.68%. If you buy the Japanese yen currency pair and sell the dollar and nothing happens for 2-years you will lose 2.68%. This example is based on interest rate differential.

Negative interest rates

Since 2014, economists have noticed a major difference in the interest rates for the economies of developed countries and the economies in emerging markets. The economies in developed countries reduced their interest rates to below zero, in an attempt to increase demand for products and services. On the other hand, the emerging market countries increased their interest rates, hoping to prevent instability in the economy and reduce the outflow of capital. For example, in February 2016, Banxico, the central bank of Mexico, in an emergency meeting decided to increase the rate for borrowing by 50 basis points. It also sold United States dollars at the applicable market rate, to increase the demand for the Mexican peso, whose value was falling. This decision increase the difference in the interest rates of Mexico and the United States. The market interpreted this decision by the central bank, as a sign of desperation or instability to prevent chaos in the global market. This is how forex interest rate differentials can change a lot of things.

Carry trade

Forex traders try to take advantage of the below-zero interest rates in some countries with carry trade. The forex traders are selling currencies having negative interest rates like the euros and Japanese yen and using the money to purchase currencies with a high-interest rate like the Indian rupee, Mexican peso, South African rand, or the Turkish lira. Theoretically, these trades may appear very profitable, due to the very large differentials in the interest rates of the countries. However, in reality, these may become extremely risky if the economic problems in the emerging markets continue or worsen.

Forex traders should be aware that historically it is observed that there is often a change in the spread for the currency pair, and this could neutralize the interest which the forex trader is making due to carry trade for the forex pair. Rate differentials are usually widening because the risk is creating problems for the borrowers in the countries. New forex traders should be cautious while considering carry trade since it is fairly risky. In 2019, there have frequent fluctuations in the commodity rates, and trade disputes between the US and China have adversely affected the yield for some of the currencies having higher interest rates. Also, uncertainty about the future has led to an increase in investment, the flow of funds to countries which have low or negative interest rates

The Best Long Term Forex Strategy

by Fxigor

How to trade long term forex strategy and How to Plan an Effective Long-Term Forex Trading Strategy in 2020?

In the world of forex, it would be essential to have different types of trading strategies for the short term. Along with it, long term planning is equally essential. With the forex trading strategy for the long run, you aim towards larger prospective profits with even little amount of capital investments. Also, these wouldn’t translate to premature stop losses, unlike trade approaches that are short term.

Making an efficient trading strategy for the long term

Recently we created article Forex Weekly Strategy.Traders need general advice about How to Plan an Effective Long-Term Forex Trading Strategy because trading rules are not only important things. Traders need to see bigger picture.

It’s better to have a clearer picture of what you would like to have from the forex market. The target has to break down the following.

Fundamental analysis and long term system and COT report

The term would refer to proper tracking of the progress of commanding economy heights while are known as fundamentals that would go along with the aforementioned idea. Fundamentals would be things such as interest rates, employment, CPI along with politics.

While trading in the big picture, you would have to know about fundamentals for the involved currencies. It’s much better not to avoid interest rates when trading a bigger picture. Upon holding currency trade for higher than a day, you’ll also notice a thing which is known as rollover. This depends on the involved currencies with the trade direction, you would also pay little interest or also earn interest as well. For the part, if a country pays the ideal amount of interest, the world traders purchase currency against weak currencies while forming trends.

For me, Interest rate, Industrial production, GDP and current high important news are the most important information that I check before any new long term trade. For example, if I want to trade EURUSD I need to know these important facts about the European Union and US economy. Daily chart and Fundamental analysis need to show the exact same direction of the trade before any trade execution.

I like every Tuesday to check the COT report. How to use the COT report in forex trading? In the COT report is most important to figure out Reversals Type One or Reversal Type Two and using knowledge from that to assume the next long term movement in the forex market.
What we can see in COT report :

Try to see Reversals Type One – When the spread between commercial traders and large investors is big, then we should expect a market reversal.

Reversal Type Two – When large traders start to reverse their positions (i.e. the large investor’s line’s trend starts reversing), we can expect a market reversal most of the times.

Weekly charts and price levels

In step 2, traders need to see the big picture using the weekly chart, to get the idea for Long Term Forex Strategy. On the weekly chart, the trader needs to analyze important levels, last month and last year high and low, close prices, important Fib. levels. Important price levels are trader’s edge, an important trigger for any trade.

So, if you’re not grasping on the happening on currency pairs, it is better to view all weekly chart details with a step back. This would stop you from making uneducated guesswork.

Larger weekly based charts make move on your daily chart appear trivial while providing you with a better feeling about the data you’re analyzing. With a step back you can minimize second-guessing.

With such items, you also make strong decisions for trading for supporting positions that you hold. You must never make trades just for making these. Also, you must easily be able to explain all of these to third parties upon having. If you follow the rule, it would help in avoiding boring trade. With real trading, especially larger picture trading, it gets slow and boring. A lot of traders get brought in and trade in a quick and leveraged way, and due to this there are a lot of failing forex traders.

Forex Trading Technical analysis for long term strategy

The technical analysis takes a lot of forms while you’re putting this into practice. If you’re saying technical analysis for a single trader, they would also think about moving averages, while another market operator would think of MACD while mentioning technical trading.

Except for price levels, technical analysis can show divergence, supply and demand areas, Pivot point areas, oscillators levels such as RSI levels, Stochastic levels, MACd, etc.

There are no perfect rules for trading orders which can tell you when to buy or sell the asset with high probability. Trading is like signature unique, and traders need to develop an original methodology for trading and for market understanding.

While forex trading strategy with a bigger picture, you look out for different technical aspects for supporting trade. So, if you’re concerned about purchasing a currency pair, it shouldn’t be technically overbought.

Am I true or wrong?

And true and wrong. Momentum traders can buy overbought assets very easy but the mean reversion trader will sell. Both can be on the right side.

Some technical analyses must be involved in supporting the decision. This helps with timing while helping to avoid getting within a bad time. Overall you would also get the right idea, but with technical analysis, in the future, you’re also able to reduce associated risks.

Trading with long term forex trading strategy is all about taking all essentials into account while coming towards an informed decision. This is one of the best available methods of forex trading that has been utilized by experts.

What is my Best Long Term Forex Strategy? I like when fundamental news and technical chart show the same. For example, the strong engulfing pattern on the daily chart or weekly chart with strong industrial production for rising currency for me is the best trading opportunity.

Risk Management Strategies in Forex Trading

by Fxigor

Forex Risk Management Strategies That You Should Know

What is the risk in forex trading? Risk is the potential for uncontrolled loss of capital in trading. Leverage in trading is a borrowed capital to increase the potential returns and in the forex market, high leverage is up to 1:1000. So traders can trade with more money than they have.

Risk percentage = Risk / Capital

But there is the problem there – high risk in the trading cause that 95% of traders lose money. Traders need to know risk management trading forex rules.

Look at this table again and again:

As we know if trader risk and make drawdown he/she will need more percentage of money to recover. If you lose 50% of your equity you need to earn 100% to recover.

The main reason why many traders don’t make money is not because of inexperience but from the poor risk management trading Forex. Due to the unpredictable nature of the Forex market, it is extremely risky. Hence, Forex risk management is considered to be the success factor irrespective of whether you are a professional or a new trader.

In this article, you will get an insight into the top risk management strategies that will help you to make profits, and avoid loss, so that you can have a good experience while trading Forex.

Risk management strategies in forex trading

In prop companies, traders will get Risk management rules and for example, it looks like this:

1) Do not fall below X% relative drawdown. For example 2% or 4%.
2) Do not fall below X% absolute drawdown. For example, absolute drawdown is the sum difference between the initial capital risked and a minimal point below that level and a lot of companies set to be 5%.
3) Do not risk over X% on each trade. For example 1% per trade or 0.5% per trade etc.
4) Do not have more than a 2% weekly drawdown. In that case, if some trader has above 2% he/she will not trade that week anymore.
5) Position size need to be calculated based on this formula.

Of course, rules can be more detail, this is just an example.

Risk management strategies and related to position size calculation too.

Position size = Winrate – ( 1- Winrate / Risk Reward Ratio) is an example of Kelly criterion (one of the simplest) but in many companies, traders use their own formulas.

If you trade alone, as a retail trader, you need to define your own rules and stick to those rules. If you lose more than wished in this day or week – just stop trade and wait for next week. Do not chase for profit.

Risk management trading Forex tips – risk management for forex trading beginners

Here are some of the risk management trading Forex strategies that would be beneficial for both experienced and beginner traders.

#1: Have a proper understanding of the risks involved in trading Forex

If you are new in the world of trading, the best thing you can do is to educate yourself. Remember that your approach towards Forex trading should be similar to that of any career, in which you need to learn about the subject in detail.

However, there is a diverse range of resources such as Forex videos, webinars, and articles that can provide you with the absolute knowledge you are seeking. After gathering sufficient information on the various aspects of Forex trading, you can test yourself by opening a demo account.

The foreign exchange market and risk management is based on the trader’s plan when and how much lots he/she will trade.

In most articles on the internet for retail traders, the maximum recommended exposure is 2%, where traders risk no more than 2% of their available capital. In my prop company, the maximum risk is 0.5% per position and a maximum weekly drawdown of 2%. This is forex exposure management.

By using virtual funds, you can use the free account to trade Forex. Such type of account will help you to trade in the markets without any risks. As such, you will be able to know the functioning of Forex markets, the different trading platforms, and utilize various trading strategies.

#2: Make use of stop-loss in managing Forex risks

Typically, a stop-loss mechanism is a process of protecting the trades from unforeseen movements in the trading market. Simply put, it is a price that has been set earlier in the system at which the trade will close automatically.

Hence, a stop-loss is very important if you want your trade to end fine. You may consider setting the stop-loss at such a level where you won’t lose above 2% of the trading balance for a given trade. After you have set the loss margin, it is wise not to increase it.

That’s because there is no point in having a safety parameter if you won’t use it properly. Although there are certain types of these in Forex, determining your stop will rely on your experience. Moreover, analyze your stops frequently to find out if they were successful or not.

Of course, there are the traders that do not like stop-loss because they can be “washed up”. It is a situation when the price hits your stop loss and then continues in your wished direction and instead of profit traders deal with a loss.

Because of that a lot of traders use hourly close stop loss or daily close stop loss. For example, the trade will be closed if daily close price is above or below some level.

Traders need to have some kind of stop-loss anyway.

#3: Never risk further if you can’t lose more

This is considered as one of the basic rules in the risk management of Forex trading. It is unfortunate that this particular mistake is very common in Forex traders who have just started out. As the market is very unpredictable, traders who are putting in more money rather than they could afford, are highly exposed to the Forex risks.

Recovering a Forex capital that has been lost is quite difficult because you need to make a greater amount to cover for your loss. It is often seen that after a loss, many traders try to recover in the following trade. This is the worst thing to do, because the account balance is low, and the risk increases. However, a tested rule is not to risk above 2% of the account balance a single trade.

Example:
We have for example trader who had $100 000 and he traded 1 lot per time. After 500 trades he has $50 000 and he still trades using 1 lot. This is a mistake. Less money less position size. He should trade with 0.5 lots.

#4: Limit the use of leverage in managing Forex risk

In layman’s terms, leverage provides you with the chance of magnifying the profits that were made out of your trading account. However, there is a possibility of a risk, and it increases. For instance, leverage on an account of $400 of 1:200 generally means that a trade can be placed for about $80,000 (200 x $400). Similarly, when you apply a 1:500 leverage, you can trade for $200,000 (500 x $400).

Hence, by investing $400 you can experience a complete impact of $200,000 or $80,000. But the risks are quite high as you can have more profits if the market stands with you. Higher leverage can attract higher levels of risk. For beginners, it is suggested to avoid high leverage.

I like high leverage but I do not want to risk more than I planned.

#5: Never have unrealistic profit expectations while managing risks

The main reason why new traders are more aggressive lies in the fact that they are having unrealistic expectations about earning profits. They harbor a false belief that only by aggressively trading they are going to earn more returns in a short time. Maintaining a conventional approach and realistic goals are the only way to get started in Forex trading.

When you are realistic, you can find out where you went wrong. It is very crucial to make an exit when you realize that you haven’t made a good trade. Although it is natural to try in such a way so as to turn the worst situation to a good one, it is not the same with Forex trading and might end in disaster. Poor decisions in trading are often fueled by greed.

#6: Manage Forex trading with take-profit

When you are clear about your expectations, a simple way of securing the profits is to use a take-profit. Just like the stop-loss, this works in the opposite way. A stop-loss automatically closes a trade for preventing further loss, whereas a take-profit automatically closes a trade as soon as it hits a specific profit level.

Based on the expectations of each trade, you will be able to set a specific profit margin and decide what should be the exact risk level for a particular trade. It is better to aim for a 2:1 ratio where the anticipated profit will be twice the risk associated with the trade.

#7: Have a proper plan in Forex trading

It is pretty common with new traders where they make an entry to the platform and make trades relying on their instinct, or following a piece of recent news. While some of them might lead to great trades, but in fact, they are the outcomes of sheer luck. For managing the risks involved in Forex trading, you will need to follow a plan that will outline a few important things.

Those include opening a trade, closing it, fixing a stop-loss to take-profit ratio, percentage of balance you can afford to risk, and so on. Generate a plan and strictly adhere to it. A good plan will keep personal emotions at bay so that you can’t over-trade.

The plan will bring discipline in your trading, and help you in managing risks. Never ignore the rules or tend to bend them, because the failure or success of every trade will depend upon it. A proven way of creating a great trading strategy is to follow and learn from people who are experts in this area.

#8: Always prepare for the worst

As aforementioned, the Forex market is very unpredictable. Despite this, there are lots of evidence in the form of past events that show how a market reacts in a certain situation. Previous happenings or events might not get repeated, but it shows a trend.

Hence, it is crucial to consider the history of a particular currency pair that you are trading. Develop an action plan that will save you from a bad situation if that happens. It is unwise to underestimate the possibilities of sudden price movements. As such, you need a plan that will sail you through it.

#9: Expand your Forex portfolio

You may have heard about a popular risk management rule, which suggests never to put all the eggs in a single basket. Well, the same is true for Forex trading as well. When you have a wide range of investment, it will protect you in situations where the other market will compensate for the particular one that has been dropped.

With this frame of mind, you will be able to manage the risk by making sure that it’s a part of the portfolio and not everything. Another way of expanding your portfolio is to exchange a few currency pairs.

#10: Try to control your emotions

When you are trading in Forex, you should know how to control your emotions. Failing to keep a tab on the emotions won’t allow you to reach a suitable position from where you can earn the profits from trading. That’s because emotional traders find it hard to adhere to the trading strategies and rules.

Stubborn traders will not exit despite losing streaks and expect that they would come out with shining colors after a few trades. But such a thing might never happen. A wise trader will withdraw after realizing the mistake with the smallest loss.

Once out, they will be patient and enter the market whenever an opportunity appears. A trader on winning streak might become greedy and stop following the proper risk management strategies.

Conclusion:

The best way in which the aspects of Forex trading works will vary from one trader to another and depend on their perspectives. Some traders will take calculated risks than the others. It is recommended to start practicing in a conventional way of reducing the amount of risk. Do not chase for profit wait for opportunity and think about risk every day.

How to Calculate Risk Reward Ratio in Forex

by Fxigor

The Complete Guide to Risk Reward Ratio

The risk-reward ratio is noted as conducting measures concerning the level of the reward that you could potentially achieve when you conduct a trade-in correlation to each dollar that you are willing to put up to risk. Take into consideration, for example, that if the risk-reward ratio is shown to be 1:3, this provides the indication that you are willing to put up one dollar to risk in order to gain three dollars in reward. Or if the risk-reward ratio is set forth as being 1:5, this denotes the fact that you are willing to put forth one dollar up to risk in an effort to make a profit of five dollars.

The next question is how to calculate the risk-reward ratio in forex? The best way to calculate the risk-reward ratio in the forex is to use pips as a measure from entry point till stop loss and target.

Risk-reward ratio = absolute value (Price entry value – stop loss value) / absolute value (Price entry value – target price value)

For example if we buy EURUSD and entry price is 1.3 and stop loss is 1.2 and the target is 1.5 then:

(Entry price – stop-loss) = 100 pips (because from 1.3 till 1.2 there are 100 pips.)
(Entry price – target price) = 200 pips (because from 1.3 till 1.5 there are 200 pips.)

Risk reward ratio = 100/200= 1/2. Risk is 1 and reward 2, 1:2.

This is the best way how to calculate the risk-reward ratio in trading.

Risk reward ratio myth

I listen to all the time expressions – High-risk high reward!

What is the relationship between risk and reward in investing anyway?
The risk-return spectrum says that the risk-reward is the relationship between the amount of return gained on an investment and the amount of risk undertaken in that investment. This rule exists in all kinds of business, not just forex. A lot of traders seeking low-risk trades where they try to risk a few pips and to achieve high returns. The problem with this approach is the very low winning rate. Psihologicly this can be very stressful for traders.

Some people may be fooled by the risk-reward ratio and do not really know what it is or do not understand it well. If you are used to seeking trades that possess a risk-reward ratio of 1:2, you could likely continue to be the loser every time.

It is realized that when a trader seeks for trades that tend to possess a risk-reward ratio that is lower than 1, the trader can potentially continue to be profitable in a consistent manner. Then this leads one to ask why this is so. This is due to the fact that the risk-reward ratio is only one factor relating to the success that is achieved.

Now in terms of the lie that you have been given in regard to the risk-reward ratio, likely you have been told that you must possess a risk-reward ratio that is set at 1:2. But that is not true at all. This is based on the premise that the risk-reward ratio does not carry much merit on its own. Take into consideration, for example, that the risk-reward ratio has been set at 1:2. This indicates that every trade that you are perceived as winning will yield for you two dollars in profits. However, the fact is that your winning rate may only be twenty percent. This means that when you have engaged in ten trades, you may win only two trades and you result in losing the other remaining eight trades.

As a result, when the math is completed, this denotes that your total loss is in the amount of eight dollars and your total gain is in the amount of four dollars. Thus, it is determined that your net loss is in the amount of four dollars.

With this being the case, it is highly evident that it is imperative to comprehend that it is fruitless to apply the usage of the risk-reward ratio by itself as a metric. Rather, it is needful to engage in the combining of the risk-reward ratio in conjunction with your winning rate in order to be able to achieve a determination concerning if you will make profits in the long term–which is also referred to as your expectancy.

How to use the risk-reward ratio to be profitable

Risk reward ratio traders need to use together with the Winning ratio and Kelly ratio to create better position size and improve trading performance. If you use 1:5 risk-reward ratio and your winning ratio is 3% it is bad, even you have a great risk-reward ratio.

You need to know the secret in order to be profitable. Thus, you must divide the size of your winning by the size of your average loss and add one to it. Then you are to multiply this by your winning rate and then subtract one from this. This will determine your expectancy when you are conducting trades.

In a scenario where you conduct ten trades, six are counted as winning trades. On the other hand, four are counted as losing trades. Therefore, the result is that your winning percentage ratio is expressed as sixty percent or as six over ten. Then if the case is that six winning trades equated to grant you profits in the amount of three thousand dollars, it is commonly understood that your average win is regarded as being the amount of five hundred dollars. This is derived by dividing the number of profits of three thousand dollars by the number of winning trades which were determined to be six wins.

On this website, we wrote two articles: Money management expert advisor and How do you Profit from Forex Trading?. In both articles we are taling about Kelly ratio

Position size = Winrate – ( 1- Winrate / Risk reward Ratio)

In such a case that four of the trades were losses that equated to a total of one thousand and six hundred dollars, this means that your average loss is determined to be four hundred dollars. This was derived by dividing the total amount of money that was lost by the number of your losing trades.

Now it is time to apply this to the formula that was addressed previously. Thus, you will divide your winning trade average by the losing trade average and you will then add one to this amount. Then you will multiply that by the percentage of your winning trades and minus 1 from the amount. Thus, the result is that your determined expectancy is considered to be 0.35 or it may be expressed as thirty-five percent. This is regarded as being a rather positive expectancy. This means that you will likely receive thirty-five cents for every dollar that you trade over the long term.

Thus, it is realized that the truth is that there really is no foundational minimum risk-reward ratio of 1:2. This is because of the fact that one may possess a risk-reward ratio that is set at 1:0.5; yet, if the person possesses a high enough winning rate, then the trader will still result in gaining profits over the long term.

With this being the case, the primary metric for consideration in terms of importance is not to be viewed as being the risk-reward ratio. Further, it is not to be viewed as being your winning rate. Rather, the most important factor to consider in terms of metrics at this point is your expectancy rate.

With this perspective in place, it is realized that it is not a good idea to engage in the placement of a stop loss at a rate that is considered to be arbitrary, such as one hundred pips up to three hundred pips, as this effort would not really result in making much sense. But rather, it is believed that it is best to engage in leaning against the factors of the markets that serve as barriers, as they engage in the prevention of the price point from aiming at landing on your stops.

Day Trading with Risk/Reward Ratios and Win Rate

So, what is a good risk-reward ratio? The good risk-reward ratio is the ratio which with a combination winning rate gives the best profit. So alone without other rates, the risk-reward ratio is not an important parameter.

If your trading strategy offers you more trades then it can be sensible to consider that you are losing profits. By the day’s end winning trades may not always end up with profits,

The worth of losses and wins should be assessed by the day trades on the basis of their risk-reward ratio, the ratio of win-loss, acceptable risks, and losses while creating ask or bid.

To be a successful day trader, you can generate equilibrium between the risk-reward ratio and the ratio of win-rate by considering all the elements. Your risk-reward ratio should be 1.0 if the win rate is higher like 60-70% and for a win rate 40-50% it should be around 0.69-0.65.

The ratio of win/loss for Day Trading

In order to win almost all the trades, the focus of most day-traders remains on the ratio of win/loss or win-rate. Though it is a sensible move, it does not ensure that the win-rate is profitable or the success of the trader.

Win rate is the number of trades won from all the trades made by you. For instance, your win rate will be 60% if you win 3 trades out of 5.

When you divide your wins by losses then you can get your ratio of win-loss. For instance, 1.5 will be the win-loss ratio if you win 60 trades and lose 40.

So, it will be favorable for you if your win rate is more than 50% and the ratio of win-loss 1.5. But it does not assure you to make you a successful day trader because the value of the loss is more than the value of wins.

Risk/Reward Ratio in day trading

The ratio of risk-reward depends upon the amount you expect to earn from trade and how much you can lose willingly.

By using signals and patterns of the trade, day traders usually quickly enter and exit the market. So they will have to attach a stop-loss clause with every trade to show the risk you can take.

For instance, if you are trading for $10.00 then $9.90 will be your stop-loss position if you are ready for the loss of $0.10.

However, to balance your risk you will have to establish your expected pay-off with the help of your targeted profits.

Analysis of risk-reward ratio

For instance, $0.20 will be your expected profit if you expect the rise in its price up to $10.20.

In this situation, your reward will be twice your expected losses. So, 0.5 will be your risk/reward ratio.

For day traders, a preferable situation is with a lower ratio of risk/reward as it can maximize their profits.

Balancing between risk/reward and win rate

A balance in risk-reward and win rate is necessary for day traders. With a very high risk/reward ratio, a high win rate is useless. Similarly, a higher ratio of risk/reward is worthless with a very low win rate.

You will have to consider the following strategies:

It can be a profitable situation for you if with a higher win rate your risk/reward ratio is high.

You can still earn profits if your ratio of risk/reward and win rate is low.

Peak ratios in day trading

A trading strategy should be made by the traders to win trades between 50-70% as they have to trade in all conditions. Winning more trades can reduce their profitability.

They should also maintain the ratio of risk/reward of less than 1.0 to make profits.

So you should neither have a very low-risk reward ratio nor a very high win rate to earn profits.

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