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Negative risk reward ratios

  • #1
  • First Post: Edited 10:12pm Dec 26, 2012 6:28pm | Edited 10:12pm
I recently had a conversation with a trader who told me he was profitable!

He told me a little about his trading system that he has been using for the past 4-5 years and basically is is trading in the direction of the trend on a daily. He is about 80% accurate with his call allegedly, but here is the interesting part...

He has a negative risk reward ratio, so he may have a 200 pip stop but be happy to take 100-150 pips profit.

Now this got me thinking... can that be right? I mean if you can get a better strike rate then you can risk more right? not load but a little more...

I have read some of the threads here on the forex factory about risk reward but was hoping for other opinions..

I am thinking that if I begin my trading in the new year with a relativlely relaxed profit taking strategy then I can let price take me out rather than a number... alot of the times this will be less than 1:1....

What do you all think? Has anyone had experience dropping their risk reward ratio and being happy with the results?
  • #2
  • Dec 26, 2012 6:43pm Dec 26, 2012 6:43pm
Quoting Emporia
I recently had a conversation with a trader who told me he was profitable!

He told me a little about his trading system that he has been using for the past 4-5 years and basically is is trading in the direction of the trend on a daily. He is about 80% accurate with his call allegedly, but here is the interesting part...

He has a negative risk reward ratio, so he may have a 200 pip stop but be happy to take 100-150 pips profit.

Now this got me thinking... can that be right? I mean if you can get a better strike rate then you can risk more right?...
If I were you I would inquire more as to what he's doing; an 80% success rate on a trend trading strategy is exceptionally high I think. Too often I see odd money management techniques that mask a bad strategy. Why can't he wait on a sound pullback to enter on and then place the stoploss under the pullback support instead of doing a fixed pip stoploss?
  • #3
  • Dec 26, 2012 7:52pm Dec 26, 2012 7:52pm
Sounds like the 200 pip stop is mainly there as a safety net in case there's something akin to a 9/11 event. How does he know when a trend is over? I seriously doubt he lets that 200 pip stop get hit if the end of trend is up.

Are you looking to avoid the whipsaws even though your trade is in the direction of the trend? If that's the case, you might want to look into trading options instead. You don't get stopped and your risk is already defined and capped like with a stoploss except you don't get stopped out. You're just out of the money. Moreover, with options, you can still get excellent if not better r:r depending on the option type and your timing.
  • #4
  • Dec 27, 2012 12:28am Dec 27, 2012 12:28am
Quoting Emporia
I recently had a conversation with a trader who told me he was profitable!

He told me a little about his trading system that he has been using for the past 4-5 years and basically is is trading in the direction of the trend on a daily. He is about 80% accurate with his call allegedly, but here is the interesting part...

He has a negative risk reward ratio, so he may have a 200 pip stop but be happy to take 100-150 pips profit.

Now this got me thinking... can that be right? I mean if you can get a better strike rate then you can risk more...
I think its very plausible ........ I am trying to include such systems to help even out my equity curve......80% 2:1 risk/ reward is pretty tempting
wo-yoy! wo-yoy! wo-yoy! wo-yoi! wo-yoy-yoy-yoy!
  • #5
  • Dec 27, 2012 12:57am Dec 27, 2012 12:57am
0.8*1/(0.2*2)=2. a very good profit factor.
  • #6
  • Dec 27, 2012 5:14am Dec 27, 2012 5:14am
Quoting deltatrade
0.8*1/(0.2*2)=2. a very good profit factor.
Only if that is genuine statistics of 80% win ratio. I have doubt about it..
  • #7
  • Dec 27, 2012 7:06am Dec 27, 2012 7:06am
When you enter the market you assume the risk. The only thing you can control is how much you are willing to lose. If a trade moves in your direction you can control when to exit choosing to not let it turn into a loss.

Those who employ a Risk Reward ratio typically have a lower percentage for a hit rate. You achieve a higher hit rate by choosing to exit before your hypothetical profit objective is reached thus nullifying your R:R ratio but achieve a higher hit rate in the end.

This in the end all comes down to marrying the correct MM along with your trading system/method in order to achieve profitability.
Nothing is impossible, with a willing mind!
  • #8
  • Dec 27, 2012 9:36am Dec 27, 2012 9:36am
Thank you everyone for your input.

All valid points...

The reason I bring it up is it was something I was pondering with my trading... but as Trader_V put it... I think it is more a case of being happy to take a lesser risk reward if that is all the market is offering rather than going out with a set number in mind.

What I am thinking of doing it initially entering with 1:1 in mind but then either taking profit early or letting it run depending on what the market is offering up...

Is anyone else trading like I describe above?
  • #9
  • Dec 27, 2012 9:46am Dec 27, 2012 9:46am
I certainly do not. I may end up settling for 1:1 or less if my trailing stop is hit but my goal and analysis is 1.5:1 at worst for the initial target. I set at least 2 targets.

It's really not that hard to carry positive risk/reward in a trend. Buy higher lows with the initial target being the previous high and the 2nd target being beyond that high using whatever method suits your fancy. Go a few pips below the low you just bought to set the risk. Maybe pad it an extra 10 or 15.
  • #10
  • Dec 27, 2012 10:22am Dec 27, 2012 10:22am
That's not really a negative R:R, but I know what you mean. If the win% is sufficiently high, then using a reward-to-risk less than 1 is okay. You're reducing the size of your wins in exchange for a higher win rate.
  • #11
  • Last Post: Dec 27, 2012 12:17pm Dec 27, 2012 12:17pm
Expected Value = (% Correct)(Payoff)+(% Wrong)(Payoff)

so Expected Value = (.8)(200)+(.2)(-150) = 130

So the average profit per trade with this strategy is 130 pips assuming he makes 150 pips when he is right. This is a legitimate strategy if it is real.
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