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What do you think of Risk/Reward ratio?

  • #21
  • Dec 8, 2007 7:42am Dec 8, 2007 7:42am
Quoting SeekingLight
He did. He was bullish up to 114+ just 12-24 hours before...now Tiki is making up a lot of reasons to excuse why he was swayed by talk instead of the chart and that he broke at least 2 cardinal rules at once (don't listen to others & no setup=no trade)
Unfortunately for me.... SeekingLight is 100% correct.... Tiki is getting way to cocky, sloppy, and talky.....

So now I will add lots more Trading Infractions.....

The real key is......... No set-up = No Trade.....
  • #22
  • Dec 9, 2007 5:04am Dec 9, 2007 5:04am
Quoting maheswara
i ve read somewhere in the forum something called kellys formula derivation , according to it , when a trade has 1:2 R:R and a 50-50 win-lose chance , the risk taken should be of quarter (25%) of your capital on each trade , such combination would double your capital every 12 trades roughly
As far as I remember, the Kelly formula does NOT yield the correct "optimal f" unless your trading system meets some very strict crieteria.

Quoting renegade7
Risk/Reward ratio is calculated after a given # of trades. It's not somethign you decide before going into the market, otherwise you would be playing God. The idea that you can know how much your reward will be is nonsense. You are only in control of what you RISK, the prime force of MM. Risk is dependant on a number of variables which are unique to every trader: style, account balance, win % (if you know it), etc.

Go into a great setup for your system expecting a loss, and when you win (because your system is profitable in the long run) be happy. Don't decide beforehand how much you will make on that trade. A rough estimate is ok, but you will never be spot on (and most of the time not even close). Just know when to enter and how, and you will profit.
It's usually a good idea to have at least some sort of exit strategy BEFORE opening a trade. That often includes a fairly firm target price. Being "happy" when you're in profit is not quite scientific enough for my taste.

Quoting Northernstar
I certainly do not pick my trades based on risk/reward ratio. I can say that there are times and places with possibility of better reward but is it 2:1 or 5:1 is a guessing game. I only know one thing for sure, when I enter a trade I know how much I risk. If I enter long with 15 risk I do not wait for a 30 gain to close. I take what the market gives me and move on. The concept of risk/reward in my mind does not apply to forex, I am a trader not an investor.
The idea is not to "wait" and hope that price reaches 30 pips when you risk 15... The idea is to not even enter a trade unless you believe the market is heading in that direction and there is reason to believe that your target price will be reached. Risk:Reward ratios are NOT a guessing game. In fact, their purpose is to remove the guessing from money management strategies, more so for traders than investors. I'm not really sure what you are basing that statement on.
  • #23
  • Dec 9, 2007 7:00am Dec 9, 2007 7:00am
Quoting Skyhr
Here's why not too many scalpers make a good living.


Let's say you're in a trade with a 10 pip stop (15 in actually because of spread, assume spread is 5 pips for all trades) and you want a 3:1 trade. Because the stop is 15, you need 45 pips in profit, but because of the spread, the market has to actually move 50 pips.

You see how, just to get a 3:1 trade, the market has to move 50 pips compared to 10 pips to stop you out?

This is what the spread does, it kills your edge! The market movement ratio (mmr, from now on) is 5:1 but your gain is 3:1! That's pretty tough.


But let's say you're swing trading and your stop is 45 pips(50 total) and gain is 195(200 total).
Your gain is a little less 4:1 and the mmr is also 4:1. The spread has become negligible.

The higher the timeframe the less important the spread effect has on your edge.



Here's a little something for your to remember about the spread:
For X pips for stop, you need to ADD THE SPREAD.
For Y pips for target, you need to SUBTRACT THE SPREAD.
This applies to both shorts and long.

So you want a 10 pip stop, you need 15.
So you want a 50 pip target, if the market moves 50 pips, you actually get 45.

Good insight. Thank you very much.
  • #24
  • Dec 9, 2007 7:18am Dec 9, 2007 7:18am
No one can predict the future. This is why creating Risk Management is a must!
Trainee at UBS Investment Banking
  • #25
  • Dec 9, 2007 9:32am Dec 9, 2007 9:32am
Quoting Skyhr


For a fixed goal, the better your edge (higher expectancy) the lower you can risk and thus have a smoother, non-volatile equity curve. But if your edge sux, then you need to risk higher, and anything above 3% is just too crazy in my opinion, so if you want to be 40% a month and this equation is telling you that you need to risk 5%, you need to find a way to improve your edge.

I should've mentioned, that for a fixed goal, if you're risking too high to reach your goal, you have one other option, in addition to improving your edge: and that is to increase your opportunity.

With a positive edge, the more you trade (with consistency) the more your will make OVER THE LONG RUN.
  • #26
  • Dec 9, 2007 6:29pm Dec 9, 2007 6:29pm
Quoting maheswara
i ve read somewhere in the forum something called kellys formula derivation , according to it , when a trade has 1:2 R:R and a 50-50 win-lose chance , the risk taken should be of quarter (25%) of your capital on each trade , such combination would double your capital every 12 trades roughly
And how would you handle losing streaks with such a strategy????

6 losses in a row will yield the following:

Starting at 100:

Loss 1: 75
Loss 2: 75 - 75/4 = 56.25
Loss 3: 56.25 - 56.25/4 = 42.18
Loss 4: 42.18 - 42.18/4 = 31.63
Loss 5: 31.63 - 31.63/4 = 23.72
Loss 6: 23.72 - 23.72/4 = 17.79

Congratualations, you are down more than 80% if you got hit with just 6 losses in a row (And the market might be very generous to you if it decided to hit you with 6 losses only in a row)...Statistically, this is not impossible at all...


Thanks,

Nader
  • #27
  • Dec 9, 2007 8:06pm Dec 9, 2007 8:06pm
I honestly hope you do not trade that way !!! I have many times lost more than 6 trades in a row !!! In the example narafa puts out... I believe you most likely would not even get as far as he says without getting your margin call first !!!

Quoting maheswara
i ve read somewhere in the forum something called kellys formula derivation , according to it , when a trade has 1:2 R:R and a 50-50 win-lose chance , the risk taken should be of quarter (25%) of your capital on each trade , such combination would double your capital every 12 trades roughly
  • #28
  • Dec 10, 2007 2:56pm Dec 10, 2007 2:56pm
here is a nice link that explains the importance of risk/reward trading

http://www.toptraderthinking.com/top...on=viewarticle

However nobody can tell me or propose a system that gives you potensial 1:3 risk/reward trades. And that is the challenge
  • #29
  • Dec 10, 2007 3:59pm Dec 10, 2007 3:59pm
Remember, it is not a system that gives you anything... it is the trader... who knows how to trade.... you can look at any chart, any pair, and any time frame and see where you could have gotten in with 3:1 ratio...

If you think it is a system that will bring you pips... you are most likely wrong. Especially if you want to use someone else's system...

The market is hard, brutal, and merciless.... on a rare occasion the market will show its cards... and you must be there waiting to see those cards... then you can get your pips...

Quoting Time
here is a nice link that explains the importance of risk/reward trading

http://www.toptraderthinking.com/top...on=viewarticle

However nobody can tell me or propose a system that gives you potensial 1:3 risk/reward trades. And that is the challenge
  • #30
  • Dec 10, 2007 4:44pm Dec 10, 2007 4:44pm
While I think it sounds good in theory, R/R is not that practical IMO as you have to take what the market gives you - no more, no less. IOW you should be prepared to cut your losses as soon as it's evident your decision was incorrect to preserve capital regardless of risk. On the other hand you should be ready to take all the market can give you, this may involve a scaling in strategy to maximise pips per move say.
You still need to control your exposure, the way I like to do this at the moment (everything is subject to change ) is to buy in very small and increase my position as it goes in my favour.
If you look at it in that way your R/R is still there (low initial risk, potentially high reward), it's just not predefined which could cause you buy into bad trades or to stay in trades too long waiting for the reward.

cheers,
Mick.
  • #31
  • Dec 10, 2007 5:02pm Dec 10, 2007 5:02pm
Quoting Time
here is a nice link that explains the importance of risk/reward trading

http://www.toptraderthinking.com/top...on=viewarticle

However nobody can tell me or propose a system that gives you potensial 1:3 risk/reward trades. And that is the challenge
Strategies offering 1:3 risk/reward trades are available, they are not a challenge or anything...However, as in the article, you will have to watch the expectancy of the strategy...I can give you a strategy offering you 1:5 risk/reward trades, however, the expectancy of this strategy is very low that it will make you lose over the long run...The random distribution of those trades who are winners and those who are losers won't allow you to avoid some of the losers to enhance the expectancy...If you try to filter out the strategy to eliminate some of the losers, you will find yourself affecting the risk/reward ratio as adding filters will probably worsen your entries and/or exits...

Here is a simple strategy that can yield you a very good risk/reward trades...

1- Search for confirmed trends
2- Wait for a correction on ALL time frames and establish your position in the direction of the trend only at the 61.8% Fib level
3- Always place your stop loss below the beginning of the move you measured by 5%
4- Your initial target is always at the end of the move and you trail your stop loss to enhance the risk/reward ratio as much as you can

Such a strategy will produce very few number of trades with excellent risk/reward ratios, however, in 70% of the cases you will be following a dying trend...So here is a strategy with an excellent risk/reward trades, but might have negative expectancy and thus will make you lose over the long run...


Thanks,

Nader
  • #32
  • Dec 10, 2007 5:22pm Dec 10, 2007 5:22pm
The last two posts still really confirm what I also said.... because it will come down to discretionary trading at some point... and then it becomes the skill of the trader...
  • #33
  • Dec 11, 2007 8:00am Dec 11, 2007 8:00am
Quoting Tiki Trader
Remember, it is not a system that gives you anything... it is the trader... who knows how to trade.... you can look at any chart, any pair, and any time frame and see where you could have gotten in with 3:1 ratio...

If you think it is a system that will bring you pips... you are most likely wrong. Especially if you want to use someone else's system...

The market is hard, brutal, and merciless.... on a rare occasion the market will show its cards... and you must be there waiting to see those cards... then you can get your pips...

Maybe i didnt' express myself clear. Yes i agree. It is a fine art to take good risk/reward trades. And yes i dont think a system can give it to u on a regular basis because the market doesnt always give you what you ask for.
  • #34
  • Dec 12, 2007 3:48am Dec 12, 2007 3:48am
Quoting narafa
...
Expectancy = (Average win ratio x Average profit) - (Average loss ratio x Average loss)...
it is a very good formula. The formula is from fundamentals of probability calculus.

Average win ratio + Average loss ratio = 1
The unit of measurement Average profit, Average loss, Expectancy is USD. One can use per cent or something...
  • #35
  • Dec 12, 2007 4:04am Dec 12, 2007 4:04am
R:R is pretty pointless unless you know your Win/Loss ratio as well. But i don't think you can really know what the that ratio is, since the markets are always changing. oh well....
  • #36
  • Dec 12, 2007 4:19am Dec 12, 2007 4:19am
Quoting zek132
R:R is pretty pointless unless you know your Win/Loss ratio as well. But i don't think you can really know what the that ratio is, since the markets are always changing. oh well....
If you dont know what the R:R ratio is, dont trade!
Trainee at UBS Investment Banking
  • #37
  • Dec 12, 2007 5:21am Dec 12, 2007 5:21am
Quoting th_ngue21
If you dont know what the R:R ratio is, dont trade!
What is R:R? Shall you tell us? distribution model? Normal (Gaussian) distribution? smthng else?
  • #38
  • Dec 12, 2007 5:28am Dec 12, 2007 5:28am
Quoting Prof
What is R:R? Shall you tell us? distribution model? Normal (Gaussian) distribution? smthng else?
LOL,

R:R is Risk/Reward ratio
Trainee at UBS Investment Banking
  • #39
  • Dec 12, 2007 6:16am Dec 12, 2007 6:16am
Quoting zek132
R:R is pretty pointless unless you know your Win/Loss ratio as well. But i don't think you can really know what the that ratio is, since the markets are always changing. oh well....
Ok lemme put it this way.

If your risk/reward ratio is 1:1 then your win/loss ratio needs to be 50% to break even

If your risk/reward ratio is 1:2 then your win/loss ratio needs to be 25% to break even

If your risk/reward ratio is 1:3 then your win/loss ratio needs to be 33.3% to break even

So to simplify things:

If you make 10 trades in a month then 5 need to be winners if you wanna trade 1:1 risk/reward ratio and still break even.

If you make 10 trades in a month then 4 need to be winners if you wanna trade 1:2 risk/reward ratio and still break even.

If you make 10 trades in a month then 3 need to be winners if you wanna trade 1:3 risk/reward ratio and still break even.
  • #40
  • Dec 12, 2007 6:22am Dec 12, 2007 6:22am
Quoting th_ngue21
If you dont know what the R:R ratio is, dont trade!
I agree. It is a simply point but yet very powerful. I think a lot of traders dont see the importance of risk/reward trading. I know i did for a long time. And couldnt understand why i am having 90% winning trades yet i still lost money. Then i came across a webinar that changed my view forever. The presenter had an excell spreadsheet in which he show you how you can make money even if you have only 3 out of 10 winners BUT you have the correct risk/reward ratio.

No my goal is to search for something that can give me that 1:3 risk/reward strategie. So far the daily and weekly charts seems to be the best option. ou risk 100 pips in order to make 300.
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