Toss a coin?

One thing I've never been real comfortable with is the idea of a risk reward ratio. The idea that if you want to earn 20 pips, you should only risk say 10.
I'm not sure how to quite explain this.. If I toss a coin and it comes up heads 50 times in a row, how many people would bet on heads? We all know mathematically that there is an even chance of tails, but there is still the gut instinct yelling "heads, heads!"
If I put a trade on and it is a winner, what does it matter how far away the stop was? If my stop gets hit it is because that is the point that I've decided I should be out of the market, not some arbitrary figure that is a percentage of my target.

... the semi lucid ravings of someone needing sleep

Sounds fully lucid and sensible to me.

i think it's only valid for a really 1-way trend, if you enter it soon enough

FWIW I agree. There needs to be proven technical or statistical significance behind a level, or a strategy, for it to have any kind of edge. Everything else being equal, RR and win rate are approximately inversely proportional to each other. In general, setting higher RR targets, will make your win rate decrease commensurately.

Hi Marrethiel,

I think you might be looking at things the wrong way around. Instead of picking your t/p, and then calculating where your stoploss has to be in order to achieve the RR ratio you are after, do it the other way around. First pick the level that you think, "if i enter this trade, if price reaches this level i have picked wrong and should be out of the trade" THEN apply your RR ration based on your stoploss, and then go to your charts and draw your desired t/p, and stop and think to yourself, is it likely that price will reach my t/p. If not, then you dont enter the trade.

I hope this helps.

Yep, I am in agreement with this.

I just do this.. I pick the last significant low (or high) which should be support, and the expected take profit level, if the low is greater than 20% of the take profit level.. I figure I have missed the trade.

Can't skip the rule entirely, so I work within it, so my stop is not just some arbitrary figure and actually serves a purpose.

As for the comment if you win the trade what does it matter where your stop was. It matters, if you are tied up in one trade waiting for it to come back while you miss 20 good ones. I used to do that myself in some dim past!

to OP:

The reason why we want a risk to reward ratio is because we want a bigger profit and a smaller loss. Simple as that.

I understand what you are getting at. The whole as long as my trade hits TP it doesn't matter what my RR ratio is... but consider this:

If you did 10 trades and had 70% wins of 20 pips each and 30% loss of 40 pips, you will only be up 20 pips at the end of the day.
7*20=140 pips
3*40=120 pips
total made = 20.

I see some people go to the extreme to make their SL so far away that it is extremely hard to hit and make their take profit always within small ranges like 10-20 pips. There is probably a 1/50000 chance to actually get hit your stop. But if it ever gets hit, you will pretty much lose all your gains. Guess what? Things like this happen in the market very often.

You may say "that won't happen to me" coz I place my SL at SR lvls or trendlines and take profit at trendlines etc etc but the principle is still the same. You are risking more to make less. You should risk less to make more. Or at least a 1:1 RR ratio.

Ask yourself a simple question:
In a game of Russian roulette, I would double your investment everytime you survived. But 1 wrong chance and you lose your life. You are risking your life (risking more value) for money (taking less profits) Would you play it?

What if we changed the barrel to a 1000 round barrel? Would you still play?

This is exactly the same situation as above. Make less and risk more. Sure you will get ahead of a lot of people. But if you play long enough, eventually that fatal bullet will hit you and take everything away.

RR to me = rest and relaxation and these should be in proportion to the work load

other than that, i think poeple have the wrong idea, like you say why should xxpips tp mean a stop of xxpips, i know many traders who use an emergency stop position just in case there is a power cut or so ( the so called RR of this is terrible and would make the system seem usless), but thier system is what controls the exits not some fundimentally flawed idea of RR number crunching.

Many people spend plenty of time building the greatest entry system, but fail to even spend half that time looking at how to manage the exits be they Good or Bad, yes the goal is to be more profitable, but a system that is fixed is not dynamic enough to adjust to the market changes and will eventually fail - so a system needs to have rules for entry and rules for exit, if these are designed correctly then the closed trades should produce the desired effect.

Just my take on it

MPP

This is my point, while historically I can work out my ratio of wins and losses, there is not a high probability that it will continue to do so. So if I can't tell what my future ratio will be, why then should we really have a formulae for RR.
For example, when I put a trade in my platform automatically sets my stop loss at 3% of my balance but I very rarely leave it there. If a trade is looking pear shaped I'm not going to let it sit around just because my RR ratio is right. I have placed winning and losing trades where the RR is less than one (though not frequently) and seeing as I believe every trade is a winner when I put it on I don't see a problem as long as my total loss is small enough to be absorbed into the natural ups and downs of my account.
lol, I feel like I'm trying to prove the world is flat

Thats why as methodica approach is a must. You can then approximate from the law of large numbers.