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Since you’ve closed the comments to your risk/reward article, I’ll comment here since you linked to it. I’d like to see you revisit that article after doing some Monte-carlo simulations which will show that trader B with a 1:1 risk reward is actually the far more favorable option, will likely win much more, and have far better draw down characteristics. The scenarios you ran through are unrealistic and the math is incorrect, or I should say overly simplistic to the point of being misleading, because it doesn’t account for randomness when position sizing is a percentage of the account rather than a fixed $100 bet.

As you increase R:R, you win rate decreases and your loss rate increases and your possible outcomes, when randomness are factored in, get terrible. At the very least, one must consider the best and worse case scenarios to get an idea of the range or possible equity curves. Say you win 50 out of 100 trades. Figure out the equity curve of the best case, all the wins first then all the losses in that order, and the worst case, all the losses first and then all the wins. Both scenarios betting 2% of the account with a 1:2 risk reward; this should make clear that the order of wins and losses which is completely random matters a great deal with any R:R over 1:1 which in the end makes your result subject to massive luck. Do the same with 1:1 and you’ll see it’s the better approach.

ReplyWow, did you really just delete my comment about risk reward? I’ve always found you very reasonable and love your articles, can’t believe you’d just do that.

ReplyRamon,

It was removed for being off topic. If you have questions about a lesson or article where the comments section is closed, feel free to contact me via the “contact” page.

https://dailypriceaction.com/contact

– Justin

ReplyOK, that’s a valid reason, however, would you mind addressing the comment or re-opening the comments on the risk reward article; I find it an interesting place where retail traders follow myths instead of math. Math says 1:1 is better than 1:2.

ReplyNot yet. But I will after reading this most useful explanation.

Great advice Justin.

I get it, it must be used regarding the big picture. Like a Head and Shoulders pattern appears on a high TF like weekly or daily and the TP Target is far enough to add positions in between..

Well written Justin, but I have only one issue with this which is the first position’s profit is not protected. I’ll explain how I pyramid my trade.

I initially define my risk say $100 for example. I divide it into 2 trades which is $50 risk per trade. I take the 2 trades at the same price as my first trade and let one of them run to 3x my risk which gives me $150 and leave the other open to catch larger move. After this, I wait to see if there’s going to be any chance to take the 2nd trade for me to now pyramid, risking from the market’s money ($150 already keyed in). On the second trade, I risk $100 out of the $150 initially gained and move my SL to the new higher low if i’m buying or Lower high if otherwise. By so doing, I pyramid by using the market’s money. Pls pardon my English. Good to know you website. Thanks

Lakeside, thanks for sharing. However, the initial position is in fact protected as I always trail my stop loss.

ReplyHi Justin,

Thank you for another great article. I had a question to run by you regarding pyramiding with EMA’s. I’ve become very interested in scaling back the number of trades I make a month and trying to catch a handful of really good winners, thus the idea of pyramiding a position really intrigues me. On that same note, I have noticed that in addition to Support and Resistance levels (like you) I am a big believer in the 10/20 EMA levels for strongly trending pairs. I was curious if you have ever experimented in pyramiding a trade according to pullbacks to the 10/20 EMA rather than key S/R levels and what your over all thoughts are on a strategy like this?

Thanks again and have a great weekend!

Sal

Sal, I don’t typically use the 10 and 20 EMAs in this manner. I’d say 90% of the time I only use them to gauge the location of the mean.

Replyi have tried scaling into trades lately. Its yet another strategy I am working on.

ReplyHi Stephen, if done correctly, pyramiding is an excellent way to increase trading profits without increasing your risk.

ReplyTauqeer, pyramiding has worked out extremely well for me over the years. Let me know if you have any questions.

ReplyHi Justin, thanks for the tip! I was wondering, how did you calculate 2% for the risk? I understand the “R”s part from your risk/reward ratio article but I’m not sure about the 2% part. I initially thought it would be 1% instead because of a 1:2 ratio? Would you be able to clarify?

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