How To Enlarge The Risk/Reward Ratio

Public opinion has become that to enlarge the risk/reward ratio we must willingly lose the opportunity for profit or minimize the probability of our profit. In other words very risky zoom level reward or out stop loss of value that we have set. Of course you can prove it yourself through the experience of your trading strategy. One of the most effective and popular enough to enlarge the risk/reward ratio while maintaining the probability of profit is to observe price movement on a time frame trading lower, and see if there is still a logical opportunity to change the stop loss or profit target.

Here exemplified GBP/USD at the end of July 2012 on the daily chart. We will enter the market based on signals from engulfing candlestick pattern setup going, and simultaneously determine the magnitude of the risk/reward ratio. Below a brief description to recall the nature of the candlestick patterns:

Engulfing candlestick pattern consists of two bars where one of the bars ' swallow ' (engulf) the other bar with a longer body candle. This engulfing pattern will be more valid if it has a short tail or no tail, because of a long tail of uncertainty reflecting the direction of price movement. Normally traders pegged the validity of this pattern with long tail swallowing ' bar ' is no more than 20%-25% of the entire length of his body candle. This pattern suggests the occurrence of reversal of the trend (trend reversal). The signal for a sell position opening at a bearish engulfing pattern is more valid if formed on the uptrend, and otherwise the signal to buy more valid if the pattern formed on the downtrend. In addition, if formed on high trading time frame such as the daily chart, this engulfing pattern will be more accurate.

Back to example GBP/USD daily (picture below), the setup looks pretty engulfing candlestick pattern is valid as a signal for a sell position opens. Normally, traders sell open positions after the second candlestick from engulfing pattern is formed, with a complete stop loss level above the highest level of the second candlestick, and the safest profit target at the level of risk/ratio 1: 1. If we observe further price movement, target profit of + 105 pip will be realized in two bars or approximately two days.

Now let us observe the pattern of price movements and on the time frame trading lower in order to find a better entry-level position or a smaller stop loss but still logical. In this case we will see on a 1 hour time frame (H1) as follows:

Price uptrend pattern is clearly visible, and after the drawn lines of trend, it appears the price movement in the daily chart has been engulfing pattern pierced (break) trend line in the chart this H1 (circle of light blue color), and have in-retest by the bars further substantiating the downtrend. In addition, the next 3 bars after a trend line break shows a pattern of triangle (green triangle) which in this case suggests a continuation of the trend (downtrend).

Well, let's look at the possibilities of entry and opportunities to change the stop loss or profit target so that the risk/reward ratio we are getting bigger. After we compare with his daily chart, we set not to change the level of entry, but the magnitude of our stop loss above the trend line, the Fox and his triangle pattern, or about 45 pips. So compared to just look at the daily chart with stop loss 105 pip, now we can minimize the stop loss into a 45-pip profit target, and fixed + 105 pip (based on daily chart). Thus we have increase the risk/reward ratio to more than 1: 2.

We can believe that this trade will remain safe because enough trading signal is valid when we entered on the daily time frame, we simply change the size of the stop loss on a one-hour time frame, and it is still logical. In addition the impregnable and trend lines already retest in 1 hour time frame and triangle pattern that happened shows that price will not quickly reversed course.

In conclusion, we can enlarge the risk/reward ratio by looking at the pattern of price movements on a lower time frame, as well as by enlarging the risk/reward ratio doesn't mean we have to enlarge the stop loss or decrease the probability of our profit.

Posted by Unknown on Sunday, February 1, 2015 - Rating: 4.5

Title : How To Enlarge The Risk/Reward Ratio
Description : Public opinion has become that to enlarge the risk/reward ratio we must willingly lose the opportunity for profit or minimize the probabilit...

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