The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

THE HAnDbook of TECHnICAl AnAlysIs

small wins with fewer larger losses, in purely random markets. This is because
with higher R/r ratios, the take profit is farther away from the entry as compared
to the stoploss, rendering the stoploss with a higher probability of being taken
out by price. With lower R/r ratios, the stoploss is farther away from the entry as
compared to the take profit, rendering the take profit with a higher probability of
being triggered. See Figure 28.24.
We have already learned that positional risk represents the risk of stoploss
being taken out or hit. Let us now calculate the probability of a stoploss being
taken out in a purely random market for a 1:1 R/r ratio setup. Since R/r is 1:1, this
means that R= r. Therefore:

Probability of the stoploss being hit R R r

r r

=+×

=×

/( ) %

( / )

100

2 1100

50

%

= %

Statistically, one out of every two entries will trigger the stoploss. Let us now
calculate the probability of a stoploss being taken out in a purely random market
for a two‐to‐one R/r ratio setup. In this case, R = 2r. See Figure 28.25.

Probability of being hit R R r 100

2r 2r

the stoploss =+×

=+

/( ) %

( / rr 100

2 3 100

66 6

) %

( / ) %

. %

×

=×

=

figure 28.24 Comparing R/r Ratios in Random Systems.

figure 28.25 2:1 R/r Ratio Setup.