Let's talk about risk to reward ratio. This is something controversial, because setting a fixed RR (reward to risk) like 3:1 isn't fully wrong, but it isn't even right. You need to understand that there are no certainties that your trade goes to the target, it may reverse at 1:1.
You may say "yeah, but I would have already my SL at BE (breakeven) by that time, because I trailed it" and you would be correct, but what if all of your 3:1 trades end up with a BE? Your account would be actually down a little because of the commissions you paid. You would have worked hard for nothing.
That's why you shouldn't have a fixed rule like that, in trading you need to adapt, to be flexible and proactive. Your soft target may be a technical level like a strong support or resistance zone, or maybe a Fibonacci extension level with some technical confluence and so on, but your trade should remain active until you see that your fundamental reasons for the trade have changed or you lost conviction in it.
If your reasons are still there you can keep it active, maybe you can partialize (taking some profit off the table and let the rest run) or managing your SL trailing it behind strong swing points for example. If the reasons aren't there anymore just close it and get what you gained instead of hoping and losing all your gain exiting with a BE trade or worse a loss.
You can even cut your losses limiting them to a fraction of your original risk, there’s no need to holding just because of hope. You can see that this way your trade can even turn into a 5:1 or more and that will compensate for your losing trades. Remember that it’s not about being right or wrong but how much you make when you’re right and how much you lose when you’re wrong.
This article was written by Giuseppe Dellamotta.
