A lot has been written and discussed about what’s the “proper” risk/reward ratio (RRR) in trading, its tightly-coupled nature with win-rate, and if this ratio is a goal by itself (commonly answered as NO), or only a quality metric to evaluate a potential deal (commonly answered as YES).
However, I want to share with you my perspective about this, a perspective I must admit I’ve never seen taken others, so I really wonder if that’s because it’s completely bullshit, or just that traders don’t think that way (and maybe they should).
My take on this is really simple. I’m not using the RRR as a money management tool. I’m using it as a psychological one to gain my edge. For me, using 1:1 actually means “be batter than a monkey”, or than a coin flip. I mean, if I enter trades by flipping a coin, buy or sell, and always set 1:1 RRR, expectancy should be zero (putting aside spread/swap for a moment). To get a better win rate, I just need a slight edge over the coin. Or the monkey. A tiny slight edge, and with 51% win rate with 1:1 RRR I’m profitable, right? OK, so I need a bit better edge to cover spread/swap. And yet, for me, waking each morning and think – “hey, you just need to be a bit better than a monkey. That’s it. Better than a monkey!!! No way I can’t do it…” – for me this one makes all the change.
So yes, maybe I’m setting TP far away from a natural support/resistant level, and maybe I’m missing a lot of potential. I don’t know. Maybe. On the other hand, I prefer keeping the 1:1 RRR to gain the psychological edge than to play with the RRR and start thinking questions like “Am I a good trader”…
I’d really like to get your thoughts and about this.
However, I want to share with you my perspective about this, a perspective I must admit I’ve never seen taken others, so I really wonder if that’s because it’s completely bullshit, or just that traders don’t think that way (and maybe they should).
My take on this is really simple. I’m not using the RRR as a money management tool. I’m using it as a psychological one to gain my edge. For me, using 1:1 actually means “be batter than a monkey”, or than a coin flip. I mean, if I enter trades by flipping a coin, buy or sell, and always set 1:1 RRR, expectancy should be zero (putting aside spread/swap for a moment). To get a better win rate, I just need a slight edge over the coin. Or the monkey. A tiny slight edge, and with 51% win rate with 1:1 RRR I’m profitable, right? OK, so I need a bit better edge to cover spread/swap. And yet, for me, waking each morning and think – “hey, you just need to be a bit better than a monkey. That’s it. Better than a monkey!!! No way I can’t do it…” – for me this one makes all the change.
So yes, maybe I’m setting TP far away from a natural support/resistant level, and maybe I’m missing a lot of potential. I don’t know. Maybe. On the other hand, I prefer keeping the 1:1 RRR to gain the psychological edge than to play with the RRR and start thinking questions like “Am I a good trader”…
I’d really like to get your thoughts and about this.