What’s important here is to not get hung up on any one variable. We have frequently talked to traders who have become convinced that unless a strategy wins xx% of the time, or it has a 2:1 target to risk ratio, that it is not going to succeed, yet the same thing they are attempting to achieve that meets their criteria could easily end up being a dog of a strategy because they have neglected the other variables.

Here is an example of a Forex trade. We like to start by looking at our strategy’s entry point and then subtracting it from our stop area. Frequently, the safest stop areas are below the last major swing low (when going long) or swing high (when going short) – you come up with a value and then that becomes your risk. Try to use that as your profit targets when testing a system. This is a perfect place to start. It is basically 1:1 and you’ll find that many strategies that have accurate and successful entries will do a near perfect job many times of satisfying that projection in a percentage that is acceptable (of course above 50% and we like to see that occur 65% of the time to call it a definite success.)

In this example the difference from entry to swing low is 34 pips. The target is there for 34 pips above the entry – and more interesting is that the exact swing high was the calculated target. Of course it is not always going to be perfect but it is fascinating how often it will be quite close. If you find after some testing over 10, 20, 30 trades that you are frequently just missing target, or the market is going way beyond your target the majority of the times, then you just adjust your ratio and go for the risk times whatever you need to pick up that 65%+ win ratio. As long as you stay close to 1:1 or better you’re going to be “golden.”

Here’s another example of a stock, on a daily chart. Assuming your entry rules had you short at the opening of the bar you see below (49.71) you have a projection of 6.54 between the entry and the swing high. This then gives you a basis for both a stop, and your projected target, which is reached in this example. Of course, you need the rules that get you in at successful entry points but building the targets/stops from basic understanding of swing highs and swing lows (no matter the timeframe whether intraday or multi day or weeks) and projecting from there is the basis for this exact plan you will need.

You also need to have rules that tell you what to do when you get close to target which we cover in another article in detail.

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