31 May Winning Big With a Bad Ratio
Winning Big With a Bad Ratio
May 31, 2023
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I like positive reward to risk ratios.
There’s a lot to like.
Yes, they lose all the time, and that stinks,
But when you get that one winner that covers up all the losers, it’s glorious.
Although the slow journey toward actually achieving that big winner is torture. After a losing streak, the temptation to take it out early and book gains is overwhelming. And if you do take it out early, it ruins the entire methodology.
So, there are some problems with this style of trading.
You know what else I like?
You know, winning. It’s like, better than losing!
And, back in the day, after over 2,500 hours of research, I decided to trade a bad reward to risk system. Why?
Because of the Equity Curve.
And because it won so much.
Did it work?
Oh yes. I made over 100% in a year trading a bad reward to risk system.
What does that mean?
It means a system with tiny wins and big losses.
And for this particular system, the losses were 3.71 times bigger than the wins.
And I never would have stopped trading it if Tradestation hadn’t taken my beloved Forex away.
Shortly thereafter, I made a new bad reward to risk system on MT4. That was called The Heron and you can watch an old YouTube playlist here.
Here’s the gist of the system.
First you find a small pocket of the day (if you’re trading Forex. If you’re trading stocks or futures, you can just trade the normal session or you can break it down to even a smaller fragment than that.)
Then you determine the trend. I like doing that with moving averages.
Then I like to enter on a pull-back. That way you don’t get the false breakout losses.
Then you go for a small win and use a big stop. The GBPUSD Heron had a 10-pip target and a 70-pip stop. (Note: it also exited some trades using an indicator but generally it followed the target and stop rules.)
The upside is winning. And lots of it.
The downside is stopping out. Seeing many winning trades being wiped out in one fell swoop can be angering. Granted, it doesn’t happen often,
But it happens.
However, in a perfect world, the winning more than makes up for the big stopouts and it can hypothetically produce an Equity Curve like this:
That’s the GBPJPY 15-minute Heron using the original Heron settings from the course videos.
And here is the original GBPUSD 15M chart from before I made the Heron course until 2023:
At first glance, it still looks good after all these years (almost a decade).
But there is a recent drawdown period at the right side of the curve. And make no mistake, a losing streak with a stoploss that’s bigger than several of your wins can be horrifying.
Unless you find a way to make it not horrifying.
And we’ll look at that magical solution in the next Newsletter.
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.