Trading Forex: Risk; Reward; Monthly Returns

As you will have noticed, from previous posts, I’m not one for verbosity; preferring pictures to lots of words.  However, I feel compelled to share my thoughts about (what I consider to be) some of the crap ‘the experts’ tell us, as to what we should risk per trade; what the risk:reward ratio must always be and what paltry monthly returns should be our goal.

A professional financial adviser is coming to see me on Monday to discuss my pension plans. I don’t know about the rest of the world but here in the UK, we have to complete a ‘Fact Finding Form’ to determine our attitude to risk – there are a minimum of ten questions, each to answer from strongly agree to strongly disagree.  A bit overkill perhaps but a logical approach to determining what type of investments an individual should be making. So, with that in mind, on what basis can a typical ‘Forex expert’ tell anyone that they should only ever risk one or two percent of their account on any single trade?

Does that ‘expert’ know anything about an individual’s risk tolerance or what percentage of available funds are held in any single account or – and this is a key one – what a trader’s average win/loss rate is over a significant sample?

Of course there is a psychological hit, for many people (though not all), to lose ten trades in a row and suffer a significant drawdown on their account. Is the losing of ten or more consecutive trades factored in your trading plan or does your trading plan need a serious review? If it is part of your plan and a ten or twenty percent drawdown is as much as you can stomach, then one or two percent risk, per trade, would be advisable.  What if you never had more than three losing trades in a row? Risking one percent per trade and assuming you only have one live trade at any one time, losing no more than three in a row, would mean you will never use the remaining 97% of your account – it would just sit there doing nothing. To what advantage? Would it not be more sensible to increase the risk on that account and/or put the dormant funds into an interest-paying savings account, a managed fund, or a pension, etc.? 

As for risk:reward on each trade – well, again, this is completely down to a trader’s plan.  I’ve been trying out a new system this week: trading daily candles at support and resistance.  I’ve not gone for fixed risk, rather a fixed lot size (regardless of stop loss).  I’ve not worried about the risk:reward ratio; just made sure there was enough potential return to make the trade worthwhile.  This has been on a demo account, just to try the rules out, but had it been a live account of 10k, trading one lot, my profit for the week would have been 2.3k: a 23% return on one week of trading; 11 winning trades and 2 losers.  Time will tell if this is sustainable (no doubt I struck lucky) but I have ignored all the sage advice of the ‘experts’ and, at least for this small sample, done very well from it.  I will try a fixed risk of 5% next week, just to see how that works out, whilst still ignoring 'expert' advice on risk:reward ratios per trade. Perhaps I'll blow the account; perhaps not.

What about anticipated returns per month? The ‘experts’ will tell you not to expect more than one or two percent per month but why? Why not an ultimate goal of ten or twenty percent return per month?  If you risk two percent on each trade and only did two trades per day with a 56% win rate at 1:1 R:R, your returns for the month would be a bit short of 10%. That is from being right just over half the time.  If your monthly goal is only one or two percent profit on your trading a/c, you probably have very limited risk tolerance and low expectations of your trading system; and/or … you are unwisely storing all your available funds as dormant money in you broker's bank account.

‘Each to their own’, is the best advice any ‘expert’ should ever give on risk and reward.