2 Percent Risk with 2R Multiple

I’ve been emulating my real account trades with my demo account for the January forex trading contest.  I’m currently in first place with a return of 11.16%.  After today though, my return will drop 2 percentage points to about 9% since I lost 2% on a trade.  I don’t know if this will be enough to hold on to the lead.  

This is an overview of how I’ve been trading so far in January 2008: 

  1. I have been risking exactly 2% on every trade.  No more, no less.  
  2. I’ve been using my forex position size calculator everyday when figuring out my trade size and find it very handy.  Some of you have commented the same.  
  3. My R-multiple on every trade has been 2R.  For those of you that haven’t heard of R-multiple, it’s really just an abbreviation for reward-to-risk.  2R means my reward-to-risk is 2:1.  
  4. I’m not watching my positions so there isn’t any fancy money management going on.  I haven’t once set my stops to breakeven. I’m just letting them ride.  If they hit my target, they hit it.  If they don’t and stop out, so be it.  This is quite different from what I’ve done in the past.  In the past, I’ve been quick to set my stops to breakeven when they move a little in my favor.  The consequence of doing this was typically a gain/loss of zero.  I can’t tell you how many times I’ve moved my stop to breakeven only to see it get stopped out.  Then I have to watch as the price goes back in the direction I was trading where it hits my initial target price.  This to me was more frustrating than losing.  I’d rather stick to my guns on a trade instead of playing it scared. 


3 Responses to “2 Percent Risk with 2R Multiple”

  1. Uri on January 16th, 2008 5:51 am

    Here’s something to think about. It’s a bit of a paradox to me. Clearly the conventional wisdom is as you write – the potential for reward should greatly exceed the potential for loss by 2:1, 3:1, etc. And that would be OK if one’s ability to predict market direction was accurate most of the time – however, considering that it isn’t so simple to consistently correctly predict direction, consider the following: it’s more likely for market to move 1 than 2, so statistically it would be more likely to move to the much nearer stop loss point than the much farther take profit point. So even though on each individual trade one stands to win double, over time so many more losses will be hit than profits won so that one’s total balance can still shrink.

    When seen from this perspective it would seem that a 1:2 reward:risk ratio is preferred as over time it is more likely to result in hitting your profit points before your stop losses.

    I can’t recall ever reading anyone say this, and it would be great to see a study on the subject.

  2. Forex Trader on January 16th, 2008 10:58 am

    Looks like you’ve been reading Van Tharps books. I use the same method for trading stocks, but I limit myself to 1% of total account equity, per trade, with a 20% training stop loss. This is trend following at its best; ride your winners, cut your losers.

    For example, if I have $50K total equity, I’m willing to risk $500 on a trade. Let’s say the stock is $20/share and I’m using a 20% S/L. Therefore, $500/.25=$2K Then $2K/20(stock price)= 100 shares, so I’ll buy 100 shares at $20 with an initial S/L at $16.

    If you follow this method, you’ll end up with a lot of small “R” i.e., .75R, .30R, etc. which you get be your training stop loss, but I find those are more than offset by large “R” on my winning trades.

    Bill (Atlanta)

  3. Rich on January 16th, 2008 8:12 pm

    Thanks Bill. Good timing on your comment… I just posted something that said I was going to try to get back into trading stocks…

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