Question about reward:risk ratio

Hi all,

I have a question about reward:risk ratio.

The trading strategy which I'm very comfortable with has a very highh percentage of wins, easily above 85% of the trades are wins. I do have losses but they are few and far in between.

The thing that troubles me is the reward to risk ratio is less than one its about 0.65 well the expectancy still works out positive but the risk:reward thing troubles me a bit as everywhere else I see most people's trade systems were losses are small and the reward to risk ratio is well above 1 most times its like 3.

When I try to increase my ratio to 1 which I can, I get stopped out more often and the win to loss ratio drops. The trouble is I'm not psychologically comfy with a lower hit rate even if the reward to risk is well above 2 or 3. I prefer wider stops. Having a higher win rate sorta gives me a kind of mental satisfaction that I'm "right" in the market, so to speak. I know being right is not important and there is Soros's very old adage which says its not important how often you're right or wrong but what is important is how much you make when you're right and how little you loose when you're erong ..........but it is to me.

My question is will this style be viable in the long run as its against conventional wisdom and even goes against old maxims like let your winners run and cut your losses short.

Thanks for your help folks

My personal advice would be to try and get your RR to 1:1, but other than that keep doing what you are doing. You do need to cut loser compared to winners, but if you are comfortable with your trading then you are way ahead of many people on these boards. Don't lose that. You can adjust and perfect your system the rest of your trading career, but right now just develop psychology and discipline while trading the markets. These developments will create a solid foundation for you to build on in the future.


There is much more to this topic, especially regarding Risk Reward vs Win Rate, but I will leave it at this for now.

The hardest part of trading is getting comfortable with what you're doing. Most people can't stick with a method or approach because deep in their mind, something about it bothers them. They may never verbalize it, but it's there and it subverts them.

The goal of trading is to make money. If you're making money, then keep at it. With that r-r, it won't take much of a decrease in win rate to bring the system down, but worry about that when it happens. In the meantime, try to find a way to increase your r-r. If you can't, then so be it. If your system breaks, then that's ok as well. You'll have learned a lot by then.

Good luck.

Hi,

What you are experiencing is a normal "trade-off". Forget about the trade size or MM for a moment. There is a clear relationship between risk/reward and win/loss. The higher one, the lower the other. As an example, think about your trade frequency in your method - or in other words the amount of opportunities your method produces in a single day. If you trade lets say 10 times per day for a profit of 5 ticks, and you win 8 out of 10 trades, your risk reward ratio can be negative 2:1 and you still have a positive expectancy.

If you would keep your trade frequency constant, i.e. still perform 10 trades per day but now envisage 50 ticks per trade as a profit target, you would not be able to do it. You could however try for one trade a day with a higher risk reward ratio i.e. 1:10 and repeat the process every day and also have a positive expectancy at the end of it.

As the word expectancy describes: you can expext the market to offer you so much reward in terms of each opportunity. If you want many opportunities, you have to perform a trade-off somewhere - the market simply does not yield the same risk/reward to to the guy who trades 50 times during the SAME perid compared to the guy who only trades once.

regards
daytrading