I observed, that many new forex traders think that risk is very similar or identical to probability.
Nothing more wrong, at least according to my experience.
Looking on trades probability just as on the roll of a dice seems to be a misunderstanding. Rolling a dice is (in principle) random. But forex is more unpredictable, rather than random.
Let's take a look on the probability distribution of an ideal rolling of ideal dice. For a large number of rollings, each result (1..6), will be picked almost the same number of times.
But on forex changes are not random. Small changes are a result of huge number of unpredictable factors. Big moves are a result of small number of more predictable factors.
Basing on what are your strategy assumptions, some particular move may be less probable, even when it is not many pips away, and opposite move may be more probable, even if it is far away from the start.
So if it is not, than You cannot look only on a risk-reward ratio. More accurate would be Profitability calculated this way:
Pf = (Reward * probability of Reward) / (risk * probability of a risk)
Example:
risk = 100 pips;
Reward = 30 pips;
risk_probability = 0.10;
Reward_probability = 0.90;
Reward/risk = 0.5 but profitability Pf = 2.7 // values significantly higher than one gives better opportunities to trades
The more it is over 1 the more profitable your strategy is.
This kind of weighted RR ratio is one of the keys to profitable trading in a long term!
The question however is how to find out what is the probability of a risk or a reward.
How to calculate it?
Is it possible?
I would like to hear from You guys what is Your opinion on this topic.
Also I have a lot of knowledge and observations that I would like to share, so I am looking forward to get some interesting posts from You.
Cheers!
Nothing more wrong, at least according to my experience.
Looking on trades probability just as on the roll of a dice seems to be a misunderstanding. Rolling a dice is (in principle) random. But forex is more unpredictable, rather than random.
Let's take a look on the probability distribution of an ideal rolling of ideal dice. For a large number of rollings, each result (1..6), will be picked almost the same number of times.
But on forex changes are not random. Small changes are a result of huge number of unpredictable factors. Big moves are a result of small number of more predictable factors.
Basing on what are your strategy assumptions, some particular move may be less probable, even when it is not many pips away, and opposite move may be more probable, even if it is far away from the start.
So if it is not, than You cannot look only on a risk-reward ratio. More accurate would be Profitability calculated this way:
Pf = (Reward * probability of Reward) / (risk * probability of a risk)
Example:
risk = 100 pips;
Reward = 30 pips;
risk_probability = 0.10;
Reward_probability = 0.90;
Reward/risk = 0.5 but profitability Pf = 2.7 // values significantly higher than one gives better opportunities to trades
The more it is over 1 the more profitable your strategy is.
This kind of weighted RR ratio is one of the keys to profitable trading in a long term!
The question however is how to find out what is the probability of a risk or a reward.
How to calculate it?
Is it possible?
I would like to hear from You guys what is Your opinion on this topic.
Also I have a lot of knowledge and observations that I would like to share, so I am looking forward to get some interesting posts from You.
Cheers!