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risk reward / win loss

  • #1
  • First Post: May 30, 2010 10:35pm May 30, 2010 10:35pm
Hi all

Just sitting here on a pretty quiet trading day so far and thought i'd throw something out there for fun and for some discussion if anyone is interested.

I just thought i'd ask this question and see what everyone thought.

What risk/reward does everyone go for when they make a trade?

Everyone here seems to talk about trying to get a certain amount of pips etc etc but that is irrelevant really unless we know the risk and MM behind it.

So what do you do? Let's call it R, so if you go for a 1:1 it is 1R etc etc.

Do you put a trade on and ride it, do you have a set R you go for, do you move to b/e after reaching a certain R? I'm just interested to see the response.

Of course your R also depends on your w/l ratio so include that as well.

Another reason for asking is because i have seen so many different approaches and find it very interesting seeing the different styles. I have a friend who risks 3 times what he aims to make but has a 95% strike rate or better. On the other hand there are people who go for 10R or so and only have a 30% win ratio. So which are you?

Please let's not get into any fights, slandering etc etc. Just a good intelligent discussion.

Interested to hear your feedback and reasons for how you approach it.

Kind Regards

Z
  • #2
  • May 30, 2010 10:53pm May 30, 2010 10:53pm
My personal opinion is that R:R is a big fallacy. You can always know your risk, but you can never truly know your reward. If you have a target of 2R and price goes 1.75R and things start to look bearish, you gonna take your profit or hold out for that 2R? Many would hold out because it's "SUPPOSED" to be a 2R trade. Oh boy, I'm sure many know how this scenario plays out. Been there done that, PASS.

R:R only makes sense if you are about to take a trade and you'v figured you need 100 pip stop and notice that in 20 pips there is a major S/R level in the direction your trading, looking at R:R in that respect makes sense to pass on the trade. Outside of that it just a statistic for after your trade is closed...

Just one man's opinion...
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #3
  • May 30, 2010 11:20pm May 30, 2010 11:20pm
I never go for less than 1:1 knowing the correlation between hit rate and r/r but will scale in/out of trades to increase my r/r as much as possible but focusing on minimizing risk more than anything else and the market will determine reward. One of my favorite sayings is "You can only control how much you lose."
  • #4
  • May 30, 2010 11:38pm May 30, 2010 11:38pm
Quoting LasVahGoose
My personal opinion is that R:R is a big fallacy....
totally agree with what you say about always knowing your risk....and thanks for the reply, good to get your point of view BUT hehe i'm sure there are some who have your situation factored in and say "well it didn't hit my 2R so it didn't work "....so be it. Your description is exactly why i started the thread. Do we get too involved in each trade when we really should have our expectations worked out previously so to trade more at ease.

I'm interested to see whether people sweat it so to speak over each trade or whether they have it all factored in and say ok, on 6/10 times i know my trades will do x so i do y in which case they have set rules. As i said i have one friend who risks 3 times his reward and can be in and out in seconds. His strike rate is almost 100% and he doesn't care if the market keeps going or what happens......so although he may be in for seconds and his RR is completely out for what most would think to be normal, he is trading very successfully with something that works for him.

thanks for your feedback
  • #5
  • May 30, 2010 11:43pm May 30, 2010 11:43pm
Quoting zorroz
As i said i have one friend who risks 3 times his reward
I don't see any issue with that and it is perfectly valid depending on how one is trading their method.
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #6
  • May 30, 2010 11:50pm May 30, 2010 11:50pm
Quoting LasVahGoose
I don't see any issue with that and it is perfectly valid depending on how one is trading their method.
yeah neither do i but it's interesting hey....flies in the face of what a lot of traders would seem normal or sane but it works for him. thanks for replying
  • #7
  • May 30, 2010 11:54pm May 30, 2010 11:54pm
Generally it matters much less than people think. A good trade will be usually be profitable on a very large range of risk-reward ratios. Of course there will be an optimal ratio, but I doubt most people put in a lot of effort to narrow the range, and instead just settle on something that "feels" about right.

I don't really care about R:R. I know that if I make good decisions, r:r and winrate will combine to give a significant positive expectancy, and that is what really matters.

Quote
My personal opinion is that R:R is a big fallacy. You can always know your risk, but you can never truly know your reward.
We do know the reward when we exit with target profits. It may not make sense to exit based on a ratio and stict exit rather than trading the market, but that's another topic.

It doesn't even have to refer to those using strict stops and target orders. Those of us who exit at discretion also have an r:r, it's just not known, but instead reflected in our results.
  • #8
  • May 31, 2010 12:08am May 31, 2010 12:08am
Quoting Mr J
Generally it matters much less than people think. A good trade will be usually be profitable on a very large range of risk-reward ratios. Of course there will be an optimal ratio, but I doubt most people put in a lot of effort to narrow the range, and instead just settle on something that "feels" about right.

I don't really care about R:R. I know that if I make good decisions, r:r and winrate will combine to give a significant positive expectancy, and that is what really matters.

We do know the reward when we exit with target profits. It...
cheers....so you are of the "let the trade work out however it will workout" persuasion....i don't mean that jokingly but you like to see how each trade acts on it's own merits and make your decisions from there. thanks.

it'll be interesting to see if there are people who do just enter s/l's and tp's and take them regardless

thanks again
  • #9
  • May 31, 2010 12:44am May 31, 2010 12:44am
Find out what your hitrate or win/loss is, then find out how much you are willing to lose comfortably on a trade without messing your head up. From there you can make your risk/money management plan. Know your risk before the trade and make your rules.

I don't know what my risk:reward is before the trade, but lots of them end up being 2:1, never more risk then that though. But before the trade I don't have any set rewards or targets in mind, so this can't be figured out. Only my risk is known. But then again I am scalping, and my hitrate is high enough for me to feel confident and comfortable with that. It's all psychological to me, not strict mathematical formula. If I feel the heat.. I walk away. as a strict rule, I have a certain amount I am willing to lose for the day and if it hits that, I'm pissed and end the session.

I never set TP's... I either exit in profit when I feel the time is right based on PA, or if it go's in my favor pretty well right off the bat and gives me room, I'll lock in a few and let the market do it's thing... just trail it until it takes me out.
  • #10
  • May 31, 2010 1:52am May 31, 2010 1:52am
I agree with only knowing your risk. R:R is a bit misleading. I take 1/2 off at 3:1 and trail the other 1/2 under peaks and troughs. I have changed that recently from 1/2 off at 1:1 and trail under the p&t's. The reason I had 1:1 was because I had a high hit rate and wanted to bank some profits but this meant I wasn't making as much as I should because if I took profit at 1:1 and the other went on further, I'd halved my potential but my risk was still the same.
A bit waffely, but you get the gist.
FF journal: Peaks and Troffs
  • #11
  • May 31, 2010 1:59am May 31, 2010 1:59am
1:1 and another trading method with varying tp id say the average is arround 1:1.4

the first is a set and go strategy and the second i have to sit and stare at the computer screen...

the w/l percentage is 73.3% of the time win (at the moment)

and the other has a win rate of 56.5%


i figured that if you have more risk for reward it would automaticaly mean you would have a higher hit rate due to the probabilities so it would be more difficult to know if your wining because of a trading edge or just because of the probabilities which latter you would give back ... thats why now im trading with 1:1 or close to it , if you are loosing you will most probably know this quickly.
  • #12
  • May 31, 2010 2:21am May 31, 2010 2:21am
good insights guys, i'm hoping this ends up pretty interesting with a wide range of approaches discussed.

i certainly don't judge if one way is better than another, it's whatever works for you

not only does it come down to hit rate etc but also the emotions involved...some love to be in and out quickly, others have the patience to sit in trades and ride out swings.

i just realised i haven't given my approach.

ultimately i shoot for a 2R . once i have 1R i move to b/e as my results show that if it hits 1R then i am "usually" safe for 2R. on the occasions i get hit at b/e then the trade will usually fail anyway. rarely does it hit b/e and then go back to being a winning trade. in the time it would another setup has usually presented itself so i would rather be out than sit through a possible drawdown. i do try and watch the trade as well and if it looks like i'm going to get a blast of momentum then i will take that 2R target off and try and let it run to some degree. i'm hitting at about 75% at the moment but know i can improve that.

anyway let's keep things going and hopefully get an interesting thread
  • #13
  • May 31, 2010 2:36am May 31, 2010 2:36am
Quoting DDmaster

...i figured that if you have more risk for reward it would automaticaly mean you would have a higher hit rate due to the probabilities so it would be more difficult to know if your wining ...
Yes, If you aim for 1:1 ratio of average win to average loss, and don't close early, you will by default have a ~ 50% win rate, with 2:1 you will by default have a win rate of ~ 66%

An interesting statistics to calculate is:

Av. = average


(Av. pips per trade / ((Av. win + (Av. Loss*-1)) /2)) + 0.5

This gives you the "Normalised" win rate. It takes into account the size and frequency of losses and wins. By definition this calculation will give a result > 50% if the strategy is profitable and only if it is profitable and < 50% if the strategy is in loss, regardless of the R:R ratio and the win rate.
  • #14
  • May 31, 2010 2:57am May 31, 2010 2:57am
I tend to use 1:1 ratio of profit targets and stops, however my av. win is a bit larger than my av. loss because i sometimes close a losing trade before it hits the initial stop loss level for a small loss.

Over the past few weeks my average win has been 68 pips, average loss was 56 pips, and have had a win rate of 58%, the normalised win rate is 61%, which is a bit like saying "if av. win = av. loss, i would have had a win rate of 61%"

I don't tend to aim for more than i risk because i prefer not to hold a trade though a pullback, ideally i take profits at the end of the first wave.
  • #15
  • May 31, 2010 3:17am May 31, 2010 3:17am
Quoting rooicol
Yes, If you aim for 1:1 ratio of average win to average loss, and don't close early, you will by default have a ~ 50% win rate, with 2:1 you will by default have a win rate of ~ 66%

An interesting statistics to calculate is:

Av. = average


(Av. pips per trade / ((Av. win + (Av. Loss*-1)) /2)) + 0.5

This gives you the "Normalised" win rate. It takes into account the size and frequency of losses and wins. By definition this calculation will give a result > 50% if the strategy is profitable and only if it is profitable and < 50% if the...
Hi Rooicol

Thanks for your post and i understand where you are coming from but i want to keep the thread purely about people's actual approach they are currently using. Hope you don't take it the wrong way cos it isn't intended as such but i'm mainly keen to hear from traders about their approach to taking profits or managing their trade in regard to their risk reward. I want to forget about pips unless they are being used in an example where someone says something like " i risk 20 pips per trade and expect 40" but i would rather them say I expect 2R on my trades so we can keep pips and money etc etc out of it. I want to concentrate on the following

What reward do you expect or want from your trade in regard to your risk....or in other words your R?

do you set a strict tp due to your backtested or actual results and just get out if your trade reaches that point?

do you enter knowing your worst case then babysit or manage the trade?

do you move to b/e once a certain R is achieved then let it ride or do you manage everything once you are in?

I'm just interested in seeing or hearing about different peoples approaches and the way they go about it. I'm not interested in systems, discussion on how to work out w/l ratios etc etc.

I guess i wanted members to respond something like this.

I risk x% amount of my a/c and due to my results either live or backtesting then once i enter my trade i then manage it in such and such a way"....i do this because i like to manage it or i like to take a set R or a combination of both....who knows.....thats the bit i'm keen to hear about and discuss.

Thanks again for what you have put there but I want to try and keep the thread focussed on just those things.

Naturally if a system has a high risk compared to reward then it needs a high win loss ratio and if one has a high reward then it doesn't necessarily need as high win loss although it would be nice if it had both. Let's all take it that we know these things and get to how each of us manage our trades and what we expect from them.

kind regards

z
  • #16
  • May 31, 2010 3:18am May 31, 2010 3:18am
Quoting rooicol
I tend to use 1:1 ratio of profit targets and stops, however my av. win is a bit larger than my av. loss because i sometimes close a losing trade before it hits the initial stop loss level for a small loss.

Over the past few weeks my average win has been 68 pips, average loss was 56 pips, and have had a win rate of 58%, the normalised win rate is 61%, which is a bit like saying "if av. win = av. loss, i would have had a win rate of 61%"

I don't tend to aim for more than i risk because i prefer not to hold a trade though a pullback, ideally...
haha awesome mate, while i was writing my bit you have done exactly what i was after...thanks.
  • #17
  • May 31, 2010 4:19am May 31, 2010 4:19am
I will enter a trade if the ratio is better than even odds. When I look at where the resistance areas are for my stops and profits I will take the trade if the profit is a bigger number. I do this because I scale out of a trade via a take profit and manual trailing stop. This way if the market moves while I'm asleep I can take profit and then make an over all win if my stops get hit after.
Interestingly, I looked at my results today for this month so far. Adding the proffits and losses (losses as a positive number), my win loss ratio is almost spot on to the Fib/Golden ratio of 0.62:0.38... numbers are funny things some times.

EDIT: I don't like the idea of a fixed ratio because the market is always changing. Even if the change is as simple as going from trending to range bound.
  • #18
  • May 31, 2010 5:05pm May 31, 2010 5:05pm
Quoting Marrethiel
I will enter a trade if the ratio is better than even odds. When I look at where the resistance areas are for my stops and profits I will take the trade if the profit is a bigger number. I do this because I scale out of a trade via a take profit and manual trailing stop. This way if the market moves while I'm asleep I can take profit and then make an over all win if my stops get hit after.
Interestingly, I looked at my results today for this month so far. Adding the proffits and losses (losses as a positive number), my win loss ratio is almost...
thanks Marrethiel

that is another aspect to all this, scaling and how people manage that side of things
  • #19
  • Jun 1, 2010 4:46pm Jun 1, 2010 4:46pm
OK, I operate with volatility adjusted TPs (gasp) and stops, operating on a 1:5 basis.

Given that probability changes with different risk reward profiles, I've found that the most profitable trading occurs when you start as far to the left of this curve as you can. Ultimately, this becomes a balancing exercise - too far left and you're trading black swans and hardly ever winning (ergo - massive drawdowns and inc. risk of ruin). Too far right will hurt your profits. Then, using fixed TPs you move along this curve as you progress towards your goal.

To give an example - I start with a 1:5 intention. Once I get to 4R, I'm risking 5R (stop does not move to break even) to get 1R. So I effectively move from a high R:R to a low - in fact inverse - R:R.

The probability of a trade's success does change throughout the course of the trade - at 1,2,3,4 and 5R, but in each instance, the probability of moving from 1R to the next increases relative to the previous R. When it decreases, it's time to end the trade.

And finally, if you want to maintain your R:R throughout the trade, you're mad - but use a trailing stop at the same level as your inital SL. This maintains exactly the same R:R as when you start out. If you think about it long enough, you'll realise this isn't a good idea.
  • #20
  • Jun 1, 2010 5:15pm Jun 1, 2010 5:15pm
Interesting Triphop,
with a tp 5 times larger than your sl what kind of win rate can you achieve?
Is this part of a high frequency scalping strategy or a more long term swing trading style?
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