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Risk Reward Ratio is not used for making money

  • #21
  • Nov 9, 2009 6:07pm Nov 9, 2009 6:07pm
Quote
Stating that 1:1 ratio with 90% strategy is BS just tells me that you haven't traded for a long time..
I wasn't saying it wasn't possible at all (I have no idea), I was just stating that 90% is not the least one should accept at 1:1. Plenty of money can be made at a far lesser winrate.

Quote
Read some articles do some backtesting without being lazy and then come back... I am not being an ass or trying to kill you on this thread but when you state things like that...
As I understand it, you are denying that 60% at 1:1 makes money, so with all your respect, please do the numbers. Here: (0.6 x 1)+(0.4 x -1). This will give 0.2, or 20%. It makes money. Risk 1% per trade, 1 trade a day, it that gives well over 100%pa. You may do better, but I cannot understand how you can suggest that 60% and 1:1 are not profitable figures.

Quoting yonnie
sure 60% winning trades at 1:1 do make you heaps of money............in theory.
Yes, but these opportunities also occur in practice. I'm not leading anyone astray unless they assume I'm suggesting one needs a high winrate, but that assumption would be a mistake on their part. I believe all sorts of winrates and risk-to-reward ratios can be exploited. Ultimately, I'm simply suggesting that the typical "wisdom" that suggests one needs a high r:r is not necessarily true.
  • #22
  • Nov 9, 2009 6:47pm Nov 9, 2009 6:47pm
Quoting Mr J
I wasn't saying it wasn't possible at all (I have no idea), I was just stating that 90% is not the least one should accept at 1:1. Plenty of money can be made at a far lesser winrate.

As I understand it, you are denying that 60% at 1:1 makes money, so with all your respect, please do the numbers. Here: (0.6 x 1)+(0.4 x -1). This will give 0.2, or 20%. It makes money. Risk 1% per trade, 1 trade a day, it that gives well over 100%pa. You may do better, but I cannot understand how you can suggest that 60% and 1:1 are not profitable figures.
This depends on how much you are risking, the nature of drawdown is that you need to make more than you lost to cover losses. For example, if you lose 50% of your account, you need to make 100% on the new amount. Or if you lose 33% of your account, you need to make 50% on the new amount to get back where you were. 60% on 1:1 would only work if you were trading an EXTREMELY small % of your account. If you are going to argue based on mathematics, you need to include the drawdown math. You really do need a higher win % to make it worth it. You will have losing streaks with a 60% hit rate which will significantly draw down your account.

If you had 6 winners for 1% gains and 4 losers for 1% gains (1.01^6*.99^4) your 60% hit rate would leave you with a measely 1.9% for 10 trades. Not 20%. So, if something changed in the market and you had a bad streak, or if you just had a bad day, it would take you forever to recover.

Hope this helps.
  • #23
  • Nov 9, 2009 6:49pm Nov 9, 2009 6:49pm
Quoting charlyher
Yeah. Drop the risk reward, drop the high probably entry, and fancy exit techniques. Drop the technical analysis and drop the fundamentals.

If playing by the book was going to make people winners, wouldn't
we all be rich today? I wonder.

Wow! Am I the only person that can read a book? Why are there not
many winners. Hey, roughly 95% are losers in this business.

Tell me that the losers cannot read a book or something! Wow!
We all have the same recipe in this game. Technically, the
purpose of a recipe is to create the same outcome. Yet,...

This is the most beautiful words i have even seen. I believe you are the best trader! Hope you can share you anwser with me. lol.

Traders who claimed they have a lot of experiences and making a lot of money and giving away their methods etc. are not the best trade. They are trying to make more money selling their books than real trading. Gann, Dr. Alex, these people are not the best ones. The real best traders are hiding between us and you can never see them.
  • #24
  • Nov 9, 2009 7:10pm Nov 9, 2009 7:10pm
Quoting charlyher
Yeah. Drop the risk reward, drop the high probably entry, and fancy exit techniques. Drop the technical analysis and drop the fundamentals.
If playing by the book was going to make people winners, wouldn't
we all be rich today? I wonder.
....Tell me that the losers cannot read a book or something! Wow!
We all have the same recipe in this game. Technically, the
purpose of a recipe is to create the same outcome. Yet, playing by
the books is obviously ain't helping much.
....
if u want to drop the risk-reward trash,
then drop the 'book & recipe' trash too.

u have 2 very incorrect analogies.
there is NO single recipe u can use & follow in trading.
oftentimes, changing just 1 ingredient (adding or subtracting) in a recipe can make a HUGE difference.
relatively speaking, there aren't many good books to read about trading. many trading books are identical in content & trash. there are traders here who dont read/have stopped reading books, & yet are profitable.

Money Management, specially Psychology, are the most vital trading issues u can't learn by simply reading books/forums/'recipes'. the key is inside everyone of us.

stop confusing people. & stop using analogies PLEASE.
  • #25
  • Nov 9, 2009 7:30pm Nov 9, 2009 7:30pm
Quoting Cbh123
If you had 6 winners for 1% gains and 4 losers for 1% gains (1.01^6*.99^4) your 60% hit rate would leave you with a measely 1.9% for 10 trades. Not 20%. So, if something changed in the market and you had a bad streak, or if you just had a bad day, it would take you forever to recover.

Hope this helps.
It helps make the thread entertaining.

You're off by a factor of ten. Ten trades at 1% each represents a turnover of only 10% of the account. A 2% gain on 10% is the same thing as a 20% gain on 100% of the account. That's what the 20% expectancy figure represents.

You also rounded 1.019692 down to a 1.9% gain. Its proper rounding to one place after the decimal would be 2.0%.

Try doing the same example with 100 trades and you get slightly less than 15%.
  • #26
  • Nov 9, 2009 8:16pm Nov 9, 2009 8:16pm
Quoting Cbh123
If you had 6 winners for 1% gains and 4 losers for 1% gains (1.01^6*.99^4) your 60% hit rate would leave you with a measely 1.9% for 10 trades. Not 20%. So, if something changed in the market and you had a bad streak, or if you just had a bad day, it would take you forever to recover.
The risk is 1% of account per trade. 60% of the time we would win 1%, and 40% lose 1%. Overall, we would gain 0.2% on our account per trade, or 20% on the amount we risk. The winrate is irrelevant though, I could substitute it for a 30% winrate with a 3:1 R:R, and we'd still have our 20% edge. This is my point: we shouldn't get caught up with winrate and risk-to-reward ratios. There are many strategies to make money trading, and the optimal R:R will vary from strategy to strategy. All that matters is that we trade with positive expectancy. It doesn't matter how we get there.

I'm really not sure why the discussion has continued, as it is a very simple mathematical concept. Again : (60% x 1)+(40% x -1). Add any numbers you want, 1:1, 2:1, 1:2, 10:1 etc, there are always profitable combinations. Sure, something extreme like 1:10 (reward:risk) might not be practical, but 1:1 certainly is.
  • #27
  • Nov 9, 2009 8:47pm Nov 9, 2009 8:47pm
Quoting Mr J
The risk is 1% of account per trade. 60% of the time we would win 1%, and 40% lose 1%. Overall, we would gain 0.2% on our account per trade, or 20% on the amount we risk. The winrate is irrelevant though, I could substitute it for a 30% winrate with a 3:1 R:R, and we'd still have our 20% edge. This is my point: we shouldn't get caught up with winrate and risk-to-reward ratios. There are many strategies to make money trading, and the optimal R:R will vary from strategy to strategy. All that matters is that we trade with positive expectancy. It doesn't...
The other poster is assuming that the position size is revised after each single trade to maintain a constant ratio of trade size to account size. In this case the hyperbolic relationship comes into play, reducing the expectancy.

You're assuming a constant trade size over a set number of trades, even in the face of a string of wins or losses. This makes the expectancy equation easier (E = winrate x avg. gain - (1-winrate) x avg. loss), but causes the percentage risked on each trade to fluctuate.

You're both coming from a different set of assumptions. Also, his math is off by a factor of 10, making it more confusing.
  • #28
  • Nov 9, 2009 9:40pm Nov 9, 2009 9:40pm
I'm not making an assumption, I just kept it simple in order to be as clear as possible. Precise numbers aren't what illustrates my point. As for CBH123, we're not coming from a different set of assumptions, he just misunderstood what I said (he thought 20% return on the account, instead of 20% return on risk).
  • #29
  • Nov 10, 2009 10:45am Nov 10, 2009 10:45am
Quoting Mr J
I'm not making an assumption, I just kept it simple in order to be as clear as possible. Precise numbers aren't what illustrates my point. As for CBH123, we're not coming from a different set of assumptions, he just misunderstood what I said (he thought 20% return on the account, instead of 20% return on risk).
I apologize, I didn't know you were speaking in terms of return per risk. That makes more sense.

As far as what I said though, it does still apply. A positive expectancy is reduced when drawdown is considered. Because making 10%, then losing 10%, does not leave one at their original investment, but rather at 99% of their original investment. So systems with higher hit rates will perform better when compounded than systems with lower hit rates and the same expectancy as per your equation. Most traders here want to grow their capital (i.e. compound) so I was just letting you know to make sure to include that in your equation.

Cheers.
  • #30
  • Nov 10, 2009 11:08am Nov 10, 2009 11:08am
Quoting capitalist88
You're off by a factor of ten. Ten trades at 1% each represents a turnover of only 10% of the account. A 2% gain on 10% is the same thing as a 20% gain on 100% of the account. That's what the 20% expectancy figure represents.

You also rounded 1.019692 down to a 1.9% gain. Its proper rounding to one place after the decimal would be 2.0%.

Try doing the same example with 100 trades and you get slightly less than 15%.
Actually he was talking about risking 1% per trade, which would imply a 1% gain on winners or 1% loss on losers, as he was speaking of a 1:1 R:R strategy. I don't see how I'm off by a factor of ten?

I've rounded down because I would rather be conservative. Who in their right mind would round expected results up? Maybe in math land that's normal but I'm not going to assume I'll make a higher return than I actually will, so I'd rather truncate and be conservative.

I was only commenting because I think saying a 60% return on a 1:1 R:R system makes "tons of money" needed clarification (especially for newer traders or people who don't understand math very well). I am not saying you can't make money with a 60% hit rate and 1:1 R:R, just that there are other factors. It seems like you are more concerned with criticizing my post than helping.
  • #31
  • Nov 10, 2009 11:34am Nov 10, 2009 11:34am
Obviously positive expectancy is a must but so is the ability to stick to a winning plan during drawdowns.

Any system with a profit factor of 1.2 (i.e. $1.2 won for each $1 lost) should yield an infinite amount of money if traded long enough but that doesn't mean that your account equity will be a smooth upward curve.
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  • #32
  • Nov 10, 2009 11:58am Nov 10, 2009 11:58am
Another picture of randomness, this time 100 random curves with the same 1.2 PF. Notice that after 100 trades a fraction of the curves are underwater.

You can have fun generating your own on http://www.hquotes.com/kelly.html and going down to the java applet link.
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  • #33
  • Nov 10, 2009 4:40pm Nov 10, 2009 4:40pm
Quoting Cbh123
.

As far as what I said though, it does still apply.....so I was just letting you know to make sure to include that in your equation..
Obviously we can't perfectly compound results in the real world, but it wasn't necessary for my point. I wanted to make it as simple as possible as some were already not following! I'd only bother considering it if I wanted to calculate growth estimates (which I do not do), or if I was trading aggressively (which I also don't do).

Quote
I was only commenting because I think saying a 60% return on a 1:1 R:R system makes "tons of money" needed clarification

"Tons of money" as most people would perceive it. I didn't say whether these figures includes spread, fees, real world inefficiencies etc, but again that goes beyond the point. I wasn't out to prove that 60% and 1:1 specifically will make people rich, but that people shouldn't be so narrow-minded about winrates or R:R.

Quote
(especially for newer traders or people who don't understand math very well)

My point for newer traders is to just find profitable situations, rather than focusing strictly on certain winrates and R:R. Find good opportunities, minimise losses and maximise profit. The winrate and R:R will sort itself out.
  • #34
  • Nov 10, 2009 5:27pm Nov 10, 2009 5:27pm
I am afraid majority of the suckers will be losers in the long run.
Foolish pride, disillusioned intelligence, and silly pros will breakdown
sooner or later.

Yeap, I believe that the market or whoever is behind the market
cannot be that dumb. Think about it. If people play by the
book such as risk reward, scaling in/out, pyramiding, swing trading,
etc.... Wouldn't the market be smart enough to design a system
to adapt itself to all the strategies?????

Of course. The market is not dumb. It is forever adapting to
all the strategies out there. And therefore, all will lose sooner or
later.

Do you think that since you are in the WRONG bus, you can always
get out of the bus and take the RIGHT bus? If only the market
was here to make you rich, but I doubt it.

The market is here to make as much as it can from everyone!!!
Quit while you are winning. Same thing for poker, blackjack, and anything
else. Oh! You have not lost; this means that the market
has not gotten to you yet. It will collect sooner or later.

When you reach this stage and look back, you will say I was right.
You will regret not believing in me. Regret is a phase we all go through!
  • #35
  • Nov 10, 2009 5:52pm Nov 10, 2009 5:52pm
Quoting charlyher
I am afraid majority of the suckers will be losers in the long run.
Foolish pride, disillusioned intelligence, and silly pros will breakdown
sooner or later.

Yeap, I believe that the market or whoever is behind the market
cannot be that dumb. Think about it. If people play by the
book such as risk reward, scaling in/out, pyramiding, swing trading,
etc.... Wouldn't the market be smart enough to design a system
to adapt itself to all the strategies?????

Of course. The market is not dumb. It is forever adapting to
all the strategies out there....
What are you advocating? Are you just telling everyone to quit or what? There are quite a few profitable traders here Don't assume it is impossible because you can't do it.
  • #36
  • Nov 10, 2009 6:41pm Nov 10, 2009 6:41pm
DILLIGAF?

See attached, play around, and realise it really doesn't matter.
Attached File(s)
File Type: xls PickYourPoison.xls   215 KB | 347 downloads
  • #37
  • Nov 10, 2009 6:57pm Nov 10, 2009 6:57pm
Quoting charlyher
Yeap, I believe that the market or whoever is behind the market
cannot be that dumb.

Of course. The market is not dumb. It is forever adapting to
all the strategies out there. And therefore, all will lose sooner or
later.
Better put that tinfoil hat back on.
  • #38
  • Nov 10, 2009 7:07pm Nov 10, 2009 7:07pm
Quoting jzw
Obviously positive expectancy is a must but so is the ability to stick to a winning plan during drawdowns.

Any system with a profit factor of 1.2 (i.e. $1.2 won for each $1 lost) should yield an infinite amount of money if traded long enough but that doesn't mean that your account equity will be a smooth upward curve.
Attachment

Attachment
Which is why so few people succeed. Very few have the tolerance to see something through, especially if there is pain in the process. It is human nature to react to pain and do all things to avoid it, whether that be physical or pyschological. Until you are able to accept losses as a cost of business and stick to your plan, you will forever hold yourself to the mercy of statistics.

Razor
  • #39
  • Nov 10, 2009 7:13pm Nov 10, 2009 7:13pm
Quoting charlyher
I am afraid majority of the suckers will be losers in the long run.
Foolish pride, disillusioned intelligence, and silly pros will breakdown
sooner or later.

Yeap, I believe that the market or whoever is behind the market
cannot be that dumb. Think about it. If people play by the
book such as risk reward, scaling in/out, pyramiding, swing trading,
etc.... Wouldn't the market be smart enough to design a system
to adapt itself to all the strategies?????

Of course. The market is not dumb. It is forever adapting to
all the strategies out there....
Im not sure why you bother posting. If you are unsuccessful in your adventures due to the constant negative drone that plays in your mind then thats fine. You talk of the market being a sole entity. You have so much to learn however im afraid that unless you get past this complete negative view of the big bad wolf you wont be going anywhere. But then again why would you bother to start when you seem to have the end picture all worked out. Which leads me to wondering why you are wasting your time on a forum that is formed on the premise of trading!!!

Seriously go back to you day job, im sure you will find comfort in the constant every week monotony that results in a steady low stream paycheck.
  • #40
  • Nov 10, 2009 7:14pm Nov 10, 2009 7:14pm
The market is all changing and adapting. It gives and when the right
time come, it takes! You will regret it by being so overconfident
and loaded with foolish pride.

Of course, the market is smart. It is willing to lose little, but it will
take a lot more when the time comes. All the positive expectancy
and risk reward is PURE assumption that the number will continue that
way.

No way! You cannot assume anything. Have you ever heard of the
almighty honing BLACK SWAN that will kill your account in no time.

It is like having tails come out all the time! You lose! You lose! You lose!
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