The Case for Negative R Strategies

I risk 25 points to make 15. Every guru says I'm an idiot.

Every trading course says it. Never risk more than you make. Minimum 1:2. Anything less and you're gambling.

I risk 25 points to make 15 on every trade. By guru logic I should be broke.

I'm not, and the reason is something most traders never get told, because it ruins a good sales pitch.

Your risk to reward doesn't give you an edge

At all. It only changes what winning looks like.

Every bracket has a win rate where you break even. Risk 1 to make 2 and it's 33%. Risk 1 to make 1, it's 50%. My 25/15 needs 62.5%. Whatever you win above that line is your edge, it really is that simple.

If two strategies sit the same distance above their breakeven, they make roughly the same money for the risk taken, whatever the bracket. I did the maths expecting to be proved wrong. It comes out almost identical.

So the 1:2 crowd and I are running the same race. We've just picked different ways to suffer.

Two different kinds of pain

Their way is long runs of losses followed by a big win that bails everything out. Mine is lots of small wins and the occasional loss that eats a few days of profit.

Guess which one people actually stick with.

A 1:2 strategy winning 40% of the time makes money on paper. Over 100 trades there's roughly an 80% chance it hits you with six losses in a row at some point. Its normal worst run is seven or eight straight.

If you want to know your own chances of a losing streak, I built a free losing streak calculator that works it out for you.

My kind of strategy winning 70% of the time has about a 5% chance of six in a row. Its worst run is usually three or four.

I've never met a trader who calmly takes loss number eight on a system they believe in. They start fiddling. Skip a signal, add a filter, move a stop. The strategy that worked in testing stops being the one they're trading, and a strategy you ditch halfway through a drawdown makes nothing.

Why prop accounts make this obvious

If you trade prop accounts this gets even more obvious. Trailing drawdown is basically a streak detector. Stack enough losses before a win and you're gone. Consistency rules then stop you banking one monster day.

The big-win strategy fights both rules, while lots of small green days fit them perfectly. Loads of 1:2 traders pass on paper and blow the account for real. Their edge was fine. The rules just hate that shape of equity curve.

What the market actually hands out

Then there's what the market actually does. On NQ, of the sessions that break the initial balance, only about one in five run a full range width further. More than half manage half a width.

The market hands out half a move far more often than a full one, so if you're fading back into a range, holding out for 2R means waiting for something that mostly doesn't turn up.

Now the bad news

There's plenty of it. A negative RR edge is thin. My breakeven is 62.5% before costs and the strategy tests in the low seventies. That gap is all I've got. Lose a few points of it and I'm paying to trade.

Costs take the first bite. They're charged in points and they come out of a small target. On futures my breakeven sits around 64%. Through a spread betting broker with a one point spread it's 65%.

On an instrument with a three point spread it's 70%, and nearly all my edge is gone before I've done anything. I saw this first hand running my own bot through a broker demo this month, watching the spread hit me on the way in and again on the way out. Same signals, same market, and the broker had moved my breakeven six points.

The second problem is the one that actually hurts people. When a 1:2 strategy stops working you know about it fast, because you lose most of your trades. When a high win rate strategy stops working you're still winning most of your trades. 60% feels fine. It feels like a normal week. On my bracket it's slowly bleeding money. I had a few weeks this summer where the market went dead and my fade strategy slid well below normal, and if I'd been going on feel I wouldn't have clocked it.

Third, the win rate you see advertised means nothing. You can make any strategy win 90% of the time by pulling the target closer. I tested it on my own data. The best win rate I could squeeze out was 93%, and it lost money once costs were in. Every version I tried, whatever the bracket, sat about four points above its breakeven. So next time someone flexes a 90% win rate, ask them what the breakeven is and watch how fast the conversation changes.

The fourth problem is you. Win 70% of the time and every loss starts to feel like a mistake. So you widen the stop, just this once, to keep the streak alive. That's how these strategies really blow up. The system was fine. The trader couldn't stand losing.

If you want to run one

Track win rate minus breakeven, with your real costs in, and forget the headline number. If the gap is shrinking you've got a problem even while you're still winning.

Work out your costs before you pick a broker or instrument. With a small target they can be the difference between an edge and a donation.

Find out when your edge actually works. On mine the data says it's strongest in one window and falls apart at the cash open. Much better to know that before sizing up than after.

Don't move the stop. Ever. It's what you pay for the win rate.

And don't get excited about a good fortnight. Three weeks at 85% is exactly what a 70% strategy looks like on a hot streak.

Theirs is psychological. Mine is maths.

The 1:2 rule exists for people with no edge. A big payout on each win at least gives them a lottery ticket. Once you've got a real edge, the bracket is just a choice about which kind of pain you'd rather deal with.

At least maths shows up in a spreadsheet.