I observed that many new Currency Market traders think that risk is very similar or identical to probability.
Nothing more erroneous, at least according to my experience.
Seeking trades probability just as on the roll of a dice appears to be a mistake. Rolling a dice is (in principle) random. But Currency Market is more unpredictable, rather than random.
Let's take a look on the probability distribution of the ideal rolling of ideal dice. For a high number of rollings, each result (1. .6), will be chosen almost the same amount of occasions.
However, on Currency Market changes are not random. Small changes are a result of huge number of unpredictable factors. Big moves are a result of small number of predictable factors.
Determined by which are your egy assumptions, a few specific move might be less probable, even if it is not many pips away, and opposite move might be more probable, even if it's far away from the beginning.
If it's not, than You cannot look just on a risk-reward ratio. More accurate would be Profitability calculated this way:
Pf = (Bonus * likelihood of Reward) / (risk * likelihood of a risk)
Example:
risk = 100 pips;
Bonus = 30 pips;
risk_probability = 0.10;
Reward_probability = 0.90;
Reward/risk = 0.5 but profitability Pf = 2.7 // worth significantly higher than one gives greater chances to trades
The more it's over 1 the more profitable your egy is.
This type of weighted RR ratio is one of the keys to profitable trading in a long term!
The issue however is the way to learn what is the likelihood of a risk or a reward.
How to compute it?
Is it possible?
I want to hear from You guys what's Your opinion on this subject.
I also have a lot of wisdom and observations that I would like to share, so I'm looking forward to get some interesting articles from You.
Cheers!