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I took 300 TRADES to find the BEST Reward/Risk Ratio | 1X vs 1.5X vs 2X Forex Day Trading Strategies - YouTube
Channel: TRADING RUSH
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I took 300 trades to find the best reward
risk ratio in trading so you don't have to.
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Imagine聽that there is Bill the first who
bets that the coin will land on heads. Then
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there is Bill the second, who bets that coin
will land on tails. If the coin does land
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on the heads, Bill the first receives 10 dollars.
And if he loses the bet, Bill the first has
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to give 10 dollars out of his own pocket.
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When they flip the coin, it lands on tails.
Since it landed on tails, bill the first has
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to pay 10 dollars. Bill the first is not going
home with a loss, so they flip the coin again,
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and this time, the coin actually聽lands on
the heads and Bill makes 10 dollars. In this
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example, Bill the first is risking the same
amount that he is going to make if he wins.
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In other words, the reward risk ratio is 1.
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Now, we all know that the聽probability聽of
a fair coin landing on heads is 50 percent.
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So in the long run, Bill the first is not
losing money, but he is also not going to
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make money.
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Now let's say the coin is not fair. Let's
say the coin is bent a little, and if you
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flip it, it has a higher chance of landing
on heads. Let's say the probability of this
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rigged coin landing on heads is 60 percent.
Now if Bill the first bets on heads with a
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1 to 1 Reward risk ratio, he will most likely聽make
money in the long run. In this scenario, Bill
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the First has an edge. Or in other words,
Bill the first has a high win rate.
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But let's say he didn't have an edge. Let's
say it's a fair coin, the probability of winning聽is
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50 percent. But this time, Bill the first
receives 20 dollars if he is right, and if
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he is wrong, Bill the first only loses 10
dollars. And as you can already tell, in this
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scenario, Bill the first is most likely going
to make a profit in the long run, because聽he
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is winning more than the potential risk. In
other words, the reward risk ratio is 2 to
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1 with a 50 percent win rate.
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In the first scenario, the edge was the high
win rate. And in the second scenario, the
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edge was the high reward risk ratio.
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In the Forex and Stock Market, we look for
an edge that will make us money in the long
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run. But in reality, Forex and Stock Market
are not like a coin toss. Here, if you increase
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your reward risk ratio, the win rate goes
down. And if you try to increase the win rate,
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the reward risk ratio goes down. But it's
not always that simple. Since the very first
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video on the Trading Rush Channel, I have
been recommending聽and using a 1.5 to 1 reward
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risk ratio while testing strategies 100 times.
Most trading strategies got a good win rate
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and made good money after 100 trades. But
what would have happened if we had used a
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2 to 1, or a 1 to 1 reward risk ratio? Will
we make more money if we mess with the reward
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risk ratios? What is the best reward risk
ratio?
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To find out, I took 300 trades, and here's
what happened.
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If you are a subscriber of the Trading Rush
Channel, you probably remember the聽Schaff
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Trend Cycle trading strategy. If you come
to the Official聽Trading Rush Website, you
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will notice that it ranks fifth from the top,
just above the Ichimoku Cloud, and below the
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MACD and Stochastic Trading聽Strategy.
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When I tested that trading strategy 100 times,
I took 100 trades with a 1.5 to 1 reward risk.
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So we have that data, and already know that
with a 1.5 to 1 reward risk ratio, the聽Schaff
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Trend Cycle Trading Strategy gets approximately
a 50 percent win rate, and in the Trading
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Rush App, it made a profit of 2500. Now keep
this number in mind for a moment.
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And now, let's test that strategy again with
a 2 to 1 reward risk ratio, and again with
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a 1 to 1 reward risk ratio, to see if the
end profit is more than 2500.
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So first, I took 100 trades with the 2 to
1 reward risk ratio, and here's what happened.
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Number 1. Now聽Schaff Trend Cycle is a profitable
trading strategy, so we are expecting the
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profit graph in the Trading Rush App to go
in an upward direction. And as you can see,
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the profit line made higher swing highs and
looked very similar to an up-trending Forex
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and Stock chart. Since we increased the reward
risk ratio, we are expecting the win rate
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to fall. And as you can see, in the end, the聽Schaff
Trend Cycle with a 2 to 1 reward risk ratio,
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got an approximate win rate of 42 percent.
We will compare and talk about the profit
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number in a moment.
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But now, let's test the聽Schaff Trend Cycle
strategy with a 1 to 1 reward risk ratio.
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This time, since we reduced the profit potential
per trade, we are expecting the win rate to
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increase. The profit graph went in an upward
direction, but it was not looking good as
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the profit graph of the 2 to 1 reward risk
ratio. When we took 2 times more profit, the
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winning trade covered 2 losing trades. But
here, since we are winning the same amount
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as the potential loss, the profit line was
going in the sideways direction sometimes.
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But since we know聽Schaff Trend Cycle works,
we were expecting the overall trend to go
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up, and it did. The聽Schaff Trend Cycle with
a 1 to 1 reward risk ratio, got an approximate
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win rate聽of 55 percent.
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And now, if we compare the three reward risk
ratios side by side, you will notice that
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the win rate with 2 to 1 reward risk ratio
was 42 percent, which is 8 percent lower than
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the win rate we got with the 1.5 to 1 reward
risk ratio. And, the win rate with a 1 to
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1 reward risk ratio, was only 5 percent higher
than the win rate we got with 1.5 to 1 reward
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risk ratio.
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But that's not the interesting part! What's
interesting is that the profit with a 2 to
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1 reward risk ratio, was only 100 dollars
more than the profit made with a 1.5 to 1
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reward ratio. But on the other hand, the profit
with 1 to 1 reward risk ratio, was only 1000
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dollars, which is 1500 dollars less than the
profit we made with the 1.5 to 1 reward risk
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ratio.
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So what is going on here? We were expecting
the profit to be a little different, but the
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profit 1 to 1 reward risk ratio achieved is
a lot different than we expected.
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On paper, we expect the win rate to go down
and go up if we increase and decrease the
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reward risk ratio respectively. But in reality,
since most of us trade in the direction of
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the trend, and since in the previous video,
we created the聽Schaff Trend Cycle strategy
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as a trend following strategy, what's happening
is, reward risk ratios like 2 to 1 and 1.5
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to 1, are more likely to capture that good
price move in the entry direction. That's
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because, in a trend, the price has a higher
probability to keep moving further in the
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direction of the trend unless there is no
roadblock. 1 to 1 reward risk ratio on the
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other hand, is missing out on these big moves
by taking profits off the table early. Remember聽that
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all 300 trades were taken on the same market
structure. But the 2 to 1 and 1.5 to 1 ratio
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made money more consistently than the 1 to
1 ratio, and their profits graphs looked very
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similar.聽
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The 2 to 1 reward risk ratio didn't make a
lot more money than the 1.5 to 1 ratio, was
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because price doesn't make a big move every
single time.
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So what's the conclusion? If the trend is
really strong, or you are expecting a strong
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move in one direction, it is a good idea to
use the 2 to 1 reward risk ratio. If you have
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doubts about your entry or the trend is not
good, it is a good idea to use the 1 to 1
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reward risk ratio to increase the win rate.
And since the 1.5 to 1 reward risk ratio had
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a good win rate and made a good profit, it
is a good idea to use a 1.5 to 1 reward risk
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ratio in a good trend.
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Now, remember that even though 1 to 1 reward
risk ratio didn't make a good profit in the
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end, doesn't mean you should completely avoid
it. If you have watched some of the live trading
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videos or are supporting the Trading Rush
Channel on Patreon, you know how I use a lower
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reward risk ratio like 1 to 1, to increase
the chances of winning when the market is
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not good.
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I did a similar test a long time ago, and
after finding out that the 1.5 to 1 reward
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risk ratio is the sweet spot, I have used
it to this day. And if you are a subscriber
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of the Trading Rush Channel, you already know
that I have used the 1.5 to 1 reward risk
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ratio since the very first video on this channel.
In fact, I already knew the approximate win
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rates of most trading strategies I have tested
on the Trading Rush channel
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because I also tested them many years ago.
Except for the Donchian Channel. Donchian
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Channel Trading Strategy was a surprise. It
got a very high win rate聽of approximately
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58 percent, which is very close to the highest
win rate聽trading strategy we have tested.
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If you want to see that high win rate聽strategy,
or want to see win rates聽of more trading
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strategies, subscribe to the Trading Rush
Channel and ring the notification bell. After
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all, you don't want to risk your money with
something that doesn't work in the long run.
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Support the Channel on Patreon to get Trade
Opportunity Signals, and to see In-Depth Trade
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Analysis. Thanks for watching.
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