1:1R will make you a millionaire trader (get your notebook)

Summary

In this video, the speaker discusses key principles of effective trading, emphasizing the dangers of relying on high risk-to-reward ratios and accumulating drawdowns. The importance of a strategy with a higher win rate and lower risk-to-reward ratio is highlighted to maintain consistent profitability and investor relationships. The speaker also addresses the emotional aspect of trailing stop losses to break even, urging traders to make decisions based on logic and statistics rather than emotions. Ultimately, the focus is on developing a strategy that reduces risk, increases consistency, and fosters long-term success.

Takeaways

• 😀 High-risk, high-reward trading strategies can result in large drawdowns, which can harm relationships with investors and trading firms.
• 😀 Investors are unlikely to tolerate high drawdowns for long, especially if the trader is relying on one big win to recover losses.
• 😀 Missing out on a potential big win can lead to even bigger drawdowns, damaging the trader's credibility and investor relationships.
• 😀 A trading model with a higher win rate and lower risk-to-reward ratio (e.g., 1:2 or 1:3) reduces psychological pressure and leads to more consistent profits.
• 😀 Lower risk-to-reward ratios decrease the likelihood of accumulating large drawdowns, thus preserving investor relationships.
• 😀 Traders should prioritize a high win rate over chasing high-risk, high-reward trades to minimize emotional stress and ensure sustainable success.
• 😀 Moving stop losses to the break-even point after achieving a 1:1 risk-to-reward ratio is often based on emotional reasoning, not data-backed strategy.
• 😀 There is no statistical evidence to prove that trailing stop losses to break-even after hitting a 1:1 risk-to-reward ratio increases profitability.
• 😀 Emotional decision-making, such as protecting profits by moving stop losses to break-even, can negatively affect long-term results in trading.
• 😀 Traders should test various strategies (e.g., trailing stop losses at different risk-to-reward ratios) to identify what works best for their own approach, rather than following conventional wisdom.

Q & A

What is the primary risk of using high-risk-to-reward trading models?

The primary risk of using high-risk-to-reward trading models is that they create psychological pressure, especially when the trader is reliant on catching one big win. This can result in significant drawdowns, which may damage relationships with investors or proprietary trading firms, as they are unlikely to tolerate large losses before a big win occurs.

Why is it important not to be dependent on one big win in trading?

It is important not to depend on one big win because if the win is missed, the trader may fall back into losses, causing even larger drawdowns. This can further damage relationships with investors and proprietary firms, as they are unlikely to tolerate consecutive losses.

How does a lower risk-to-reward ratio, such as 1:2 or 1:3, improve trading strategies?

A lower risk-to-reward ratio, like 1:2 or 1:3, improves trading strategies by reducing the reliance on a single trade to be profitable. With a higher win rate, traders do not feel pressured to catch every trade, as they can afford to miss some without significant losses.

How can a higher win rate contribute to a trader's overall success?

A higher win rate contributes to a trader's success by reducing the frequency of drawdowns. This helps maintain consistency in profits and ensures that the trader can weather minor losses without experiencing major setbacks, preserving both profitability and investor relationships.

What is the main problem with trailing a stop loss to break even after hitting a 1:1 risk-to-reward ratio?

The main problem with trailing a stop loss to break even after hitting a 1:1 risk-to-reward ratio is that it is often driven by emotional reasoning. Traders do this to protect themselves from turning a profitable trade into a loss, but there is no data proving that this approach improves profitability.

Why does the speaker suggest testing different stop-loss strategies?

The speaker suggests testing different stop-loss strategies because they have found that their own strategy is more profitable without trailing the stop loss. By testing different methods, traders can identify which strategy works best for their individual trading style and risk tolerance.

What is the speaker's personal stance on trailing stop losses?

The speaker's personal stance is that trailing stop losses to break even is not an effective strategy for their trading system. They found that never trailing the stop loss results in the highest profitability, as many trades in their system go from profit back to break even and then to full take profit.

How does trailing stop losses affect the profitability of a trade?

Trailing stop losses can sometimes hinder profitability, especially if the market moves in the trader's favor and then retraces back to break even. This premature exit can cause the trader to miss out on further profits, whereas leaving the stop loss untraded may allow the market to continue toward the take profit level.

What does the speaker mean by taking decisions logically and statistically in trading?

Taking decisions logically and statistically means basing trading choices on data and objective analysis rather than emotional reactions or financial concerns. This ensures that decisions are made based on proven strategies rather than fear, greed, or discomfort.

Why is it crucial to avoid emotional decision-making in trading?

Emotional decision-making can lead to irrational choices, such as moving a stop loss to break even out of fear of losing profits, or holding onto a losing trade due to hope. These decisions are often not backed by statistical evidence, which can ultimately harm profitability and lead to avoidable losses.