December 3, 2019

What is the Most Effective Ratio of SL to TP?

What is the Most Effective Ratio of SL to TP?

What do you think is the most effective SL to TP ratio?

Whatever the ratio of Stop Loss to Take Profit may be, trading efficiency will not change.

It doesn’t matter whether it is 2:1, 1:1, or 1:3.

If you always open trades based on the specific ratio of SL to TP, it will not bring you both any additional profits and losses.

Take a look at this simple table:

Depending on the ratio, the number of winning and losing trades will change. However, if you multiply this number by the result of a trade, the output will be zero.

What conclusion can we draw from that? There is no ideal ratio of SL to TP.

What Else is There to Know?

Any trade comprises two components: the market entry and the market exit. Proper use of each component increases the profitability of your trading system as a whole.

So, by using the fixed ratio of Stop Loss to Take Profit, you neutralize the potential of the second component (exit from a trade). Simply put, you enter a trade with a signal and exit it somehow.

To benefit from the potential of the second component, SL and TP must be set deliberately according to the market situation.

Ideally, Stop Loss order should be set at such a level where the price will keep moving after the order is triggered but not immediately reverse. The opposite is true for Take Profit order: it must be set at the supposed reversal point.

Of course, this effect cannot be achieved in practice, but it’s something to strive for. Note that this doesn’t mean that you have to catch the price movement from a high to a low, but this means that you have to trade from entry signal to exit signal.

Take a look at this trade as an example:

Does the ratio of SL to TP make sense in this case? No, it doesn’t make any difference. We can set the ratio of 1:10, and we can set 10:1: it all depends on the market situation.

There are 2 useful techniques (1, 2) telling you how to set SL and TP properly.

So, the main idea is: set SL and TP where required by the market situation and don’t mind their ratio.