What are the 5 most important elements in developing a winning forex trading system which uses renko charts? Well first we have to identify how to create a winning forex trading system.We will then apply this information to help us create a winning renko charts forex trading strategy.
Each trading method should combine the following 5 essential elements.
1. Accuracy 2. Reward to Risk Ratio (Reward/Risk) 3. Expectancy 4. Position Size 5. Account Equity
How many times we win is referred to as accuracy. If we placed 10 trades and win 9 trades and lose 1 trade, our accuracy is 90%.
The Reward to Risk Ratio compares how much you win per trade compared to how much you lose per trade.
If we risk $50 to make $100, our reward is $100.Our Reward to Risk Ratio is $100/$50 or simply a 2 to 1 Reward/Risk Ratio.
How many times we are able to find a trade to enter equals expectancy. It is simply the opportunity a trading opportunity is available. If you place 12 forex trades per month with your system, your annual expectancy is 144.
But if your system allows you to enter 10 trades per day x 20 trading days per month x 12 months per year then your annual expectancy is 10 x 20 x 12 = 2,400.
Position sizing is adjusting your lot size to practice good money management. How “big” is our risk? It tells what lot size to use for each trade.Most forex traders use a fixed percentage of their trading account to risk each trade.
Account equity is simply your account balance.These 4 initial elements must take into consideration your account balance. A good forex trading strategy utilizes all 5 of these important components.
Let’s apply these 5 principles to a renko charts trading system.
Almost every new forex trader dreams of 100% accuracy. But let’s be realistic here OK? I think too many market participants focus on just this one variable. They continue to search for the “holy grail” system in an effort to improve their accuracy.
For our example let’s just say we win 15 out of every 20 trades, or 75% accuracy.
We will use a simple 1 to 1 Reward to Risk Ratio while we develop our Renko trading system for this example. If we risk $200, our winners will be $200.
We will start with a $5,000 account size and risk 1% per trade. We will trade 5 days per week and place 2 trades each day. This is equal to 40 trades per month. Our Account Equity is $5,000 and our Position Size has been defined as 1% risk per trade. Our opportunity, or expectancy to trade, is 40 trades per month.
I know I can place 2 trades per day scalping or swing trading. This would probably take 1 hour of our time each day. I will start by looking at Renko charts with smaller Renko bars such as 5 pip or 10 pip Renko bars.
We should look to risk 3 to 5 Renko bars to gain 3 to 5 Renko bars. Remember our 1 to 1 Reward to Risk Ratio?
Here is the math:
2% Risk per Trade = 2% x $10,000 Account Equity = $200 Risk Per Trade. The Reward is also $200.
If we risk 2 trades per day x 5 days per week x 4 weeks per month = we have a total of 40 trades. A 80% accuracy x 40 trades produces 32 winning trades and 8 losing trades.
32 winning trades x $40 Reward = $1,280 winning trades. 8 losing trades is -$320.
$1,280 + (-$320) = +960.
This is how you use the 5 key elements to a good trading system and apply it to developing a Renko trading system.
Tom Grennell is a forex trading system developer. He shares his passion for the forex markets via his detailed writings and recommendations. His favorite ForexRenko Charts FX Trading System can be found at Forex Renko Charts