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Help Me With This Doubt - Risk/Reward Strategies

  • #1
  • First Post: May 3, 2012 12:23pm May 3, 2012 12:23pm
Hi, Folks.

I'd like to ask a simple question for those that are profitable in FX...do risk-reward techniques really work or not ?

I mean, I tried various techniques but couldn't find any success rate at all...because everything I tried, a new issue raised: if you put, for example, a 1:3 risk-reward (say SL 30 pips and TP 90 pips), the chances of being stopped out are high (the SL is very tight); On the other hand, if you put 1:5 (SL 50 pips and TP 250 pips), the TP will hardly be achieved...so, the conclusion is obvious: these techniques doesn't work or there's something else besides that to complement it in order to make it work...

What do you think ? Anyone successful with these techniques ?

Regards,
MrJinks.
  • #2
  • May 3, 2012 1:55pm May 3, 2012 1:55pm
Quoting mrjinks
Hi, Folks.

I'd like to ask a simple question for those that are profitable in FX...do risk-reward techniques really work or not ?

I mean, I tried various techniques but couldn't find any success rate at all...because everything I tried, a new issue raised: if you put, for example, a 1:3 risk-reward (say SL 30 pips and TP 90 pips), the chances of being stopped out are high (the SL is very tight); On the other hand, if you put 1:5 (SL 50 pips and TP 250 pips), the TP will hardly be achieved...so, the conclusion is obvious: these techniques...
You are doing wishful thinking there.

you can't just decide how much reward you would like.
I has to be according to what the market can give and for that you would need to understand volatility and statistical ranges, not only that but future volatility widening evens such as NFP, what type of market you are trading.

risk reward is only relevant in the sense that you must not risk > than what you can reasonably expect.

how to calculate what you can expect is deeper subject one that I cannot claim to be an authority about, but I have made some statistical research, and I have some hypotheses.
AVT INVENIAM VIAM AVT FACIAM
  • #3
  • May 3, 2012 2:04pm May 3, 2012 2:04pm
Quoting the redlion
You are doing wishful thinking there.

you can't just decide how much reward you would like.
I has to be according to what the market can give and for that you would need to understand volatility and statistical ranges, not only that but future volatility widening evens such as NFP, what type of market you are trading.

risk reward is only relevant in the sense that you must not risk > than what you can reasonably expect.

how to calculate what you can expect is deeper subject one that I cannot claim to be an authority about, but I have made...
the redlion, thank you very much for your explanation. Do you apply these RR techniques with success ? I swear to you that I'm trying hard to learn all I can about the subject but it's a kinda complex one...

Regards,
MrJinks.
  • #4
  • May 3, 2012 2:10pm May 3, 2012 2:10pm
Quoting mrjinks
the redlion, thank you very much for your explanation. Do you apply these RR techniques with success ? I swear to you that I'm trying hard to learn all I can about the subject but it's a kinda complex one...

Regards,
MrJinks.
The idea is sound

if you make 60 pips on average on your winning trades
and 50 loss on average on your losing trades.

then over a sample space of 1000 trades you would have

(μ_w*1000) - ( μ_l*1000)= X_1

where μ_w is your winning trades
μ_l is your losing trades

and X_1= your net gain

in other words 60,000 pips- 50,000 pips = 10,000 net pips the assumption is that you are using a constant position size, meaning $ 1.00/pip or 10ct/pip always.

so yes, the logic is valid
AVT INVENIAM VIAM AVT FACIAM
  • #5
  • May 4, 2012 5:55am May 4, 2012 5:55am
Quoting the redlion
The idea is sound

if you make 60 pips on average on your winning trades
and 50 loss on average on your losing trades.

then over a sample space of 1000 trades you would have

(μ_w*1000) - ( μ_l*1000)= X_1

where μ_w is your winning trades
μ_l is your losing trades

and X_1= your net gain

in other words 60,000 pips- 50,000 pips = 10,000 net pips the assumption is that you are using a constant position size, meaning $ 1.00/pip or 10ct/pip always.

so yes, the logic is valid
Thanks the redlion. Your clarifications were very useful. I'll apply your equation to real trading situations.

Regards,
MrJinks.
  • #6
  • May 4, 2012 6:40am May 4, 2012 6:40am
btw, risk/reward is not a strategy. It does not put you ahead of everyone else. This is money mangement strategy.

when you use risk/reward what you need to pay attention to is "if i enter here, would i have to risk more than i can potentially make".
Meaning, if I enter at this point, but price will realistically only move another 50 pips, then i shouldn't be risking 100 pips.

it is something you pay attention to before you put on a trade. if you can't convince yourlsef that there is a return worth pursuing, don't put on that trade.

ultimately once you are in a trade, whether you can get the full move or not depends on the market. you take what you can get.
  • #7
  • May 4, 2012 1:12pm May 4, 2012 1:12pm
I agree. You can't assume the market will run for 50pips. The hardest lesson I have learned in trading is you can't assume the market will do anything.

The best risk reward strategy to is look at your set ups and see which ones have the highest probability of success. Success meaning, you don't get stopped out. Then adjust your positions based on that. That should be done live not backtesting.

Second, if your stop is only 5 pips load up. If your stop is 15 pips, I wouldn't trade a large amount.

Why limit yourself to only 50pips? What if the move runs for 100pips? You want to get what the market will give you and try to get as much as you can. It is the only way to stay in business.

That being said you should know the product you are trading. You should know what an average trend looks like. Meaning, from breakout to the end of the trend.

My point is - knowing the product you are trading and its average behavior will help your risk managment.

I hope that helps. Good Luck!!
  • #8
  • May 4, 2012 1:34pm May 4, 2012 1:34pm
You are looking at it the wrong way. You don't choose a risk:reward ratio and then execute your trade based on that... you choose trade and know both sides of it - where is your stop, where is your target based on facts like support/resistance whatever - then you calculate your risk:reward based on your entry in correlation with those two extremes. If you are happy with the ratio then you take the trade with the corresponding risk percentage. If not ... not
  • #9
  • May 4, 2012 5:09pm May 4, 2012 5:09pm
Quoting mrjinks
Hi, Folks.

I'd like to ask a simple question for those that are profitable in FX...do risk-reward techniques really work or not ?

I mean, I tried various techniques but couldn't find any success rate at all...because everything I tried, a new issue raised: if you put, for example, a 1:3 risk-reward (say SL 30 pips and TP 90 pips), the chances of being stopped out are high (the SL is very tight); On the other hand, if you put 1:5 (SL 50 pips and TP 250 pips), the TP will hardly be achieved...so, the conclusion is obvious: these techniques...
Theory trade time:

Assuming you have no plan, no tested and proven edge, that can shift probability into your favour; then the expectancy of a random trade with fixed stop and take profit levels would be equal to the loss of the spread over a few thousand trades (assuming a purely random outcome.)

What you need is an edge. Then tailoring your R:R, size, and the like to said plan based of the edge's expectancy.


(I put 'fixed' in bold since I wanted to be clear based on OP's example. There are ways of using trailing stops and no caps on profit to shift expectancy in a random system to at least cover the spread costs, but there's little practical point to trading like this.)
FXGears.com
  • #10
  • May 4, 2012 7:02pm May 4, 2012 7:02pm
this should help...

http://www.fxstreet.com/webinars/ses...2-78566af41e47
tradewith60
  • #11
  • Edited 3:07pm May 5, 2012 2:53pm | Edited 3:07pm
Quoting Jack_Larkin
What you need is an edge. Then tailoring your R:R, size, and the like to said plan based of the edge's expectancy.
Jack, with respect, your logic creates a catch-22, because expectancy depends on both win rate and R:R. Changing the R:R will directly affect the win rate.

David
  • #12
  • May 5, 2012 3:02pm May 5, 2012 3:02pm
Quoting 60minuteman
this should help...

First and foremost, thanks for sharing the link.

The presenter makes at least 3 inferences that are misleading IMO:

1. He talks about risk of ruin, but without reference to a number of trades, the percentages in the XLS are meaningless. For example, take two traders who have the same risk per trade, same win rate, and same payoff ratio (R:R); the trader making (for example) 10,000 trades will have much greater probability of attaining ruin than one who makes 10 trades. If he meant that the numbers reflected a theoretically infinite number of trades, then he should have said so. But in that case, risk of ruin will always be 100% (if playing a negative expectancy game) or 0% (if playing a positive expectancy game); and there were values between 0 and 100 in the body of the his XLS.

2. He infers that the lower the risk per trade, the lower your risk of ruin, and (wrongly) therefore the greater your probability of being profitable. (at 34:20: “as soon as your risk of ruin is 0, you are mathematically going to make money”). That's misleading. Just because I might risk 1% per trade doesn't mean that I'm more likely to be profitable than a much more skilled trader who might risk 2% per trade. Sure, if we were both equally skilled, then my risk of ruin is less, but it's misleading to relate that directly to profitability. In fact, everything else being equal, the trader who risks 2% will (obviously) make a higher return (albeit at greater risk) than the trader who risks 1%. It is expectancy that determines whether or not a trader is profitable, not position size — the way I understood him, he didn't make that important distinction.

3. He makes statements something like ".....at a win rate of 55%, if you move your TP wider so that you're now attaining a 3:1 instead of 2:1, then your risk of ruin decreases from (whatever) to (whatever)....". He also warns against moving profit targets after a trade is placed. All of this fails to take into account that moving the TP will almost certainly change the win rate. Everything else being equal, win rate and payoff ratio operate in approximately inverse proportion to each other.

My 2c,
David
  • #13
  • May 5, 2012 3:08pm May 5, 2012 3:08pm
Quoting hanover
Jack, with respect, your logic creates a catch-22, because expectancy depends on both win rate and R:R. Changing the R:R will directly affect the win rate.

David
Right, the terminology was a little off and I can see how that might easy to mix up. When I say expectancy in the context of an 'edge', I mean something slightly different thank expectancy from a system/plan.

An edge, will give us a directional bias, and thus we 'expect' one outcome would be more likely than another.

Where as system expectancy is more about the resulting return for each unit risked over a large trade sample size.

Just to be clear.
FXGears.com
  • #14
  • May 5, 2012 3:47pm May 5, 2012 3:47pm
Quoting hanover
First and foremost, thanks for sharing the link.

The presenter makes at least 3 inferences that are misleading IMO:

1. He talks about risk of ruin, but without reference to a number of trades, the percentages in the XLS are meaningless. For example, take two traders who have the same risk per trade, same win rate, and same payoff ratio (R:R); the trader making (for example) 10,000 trades will have much greater probability of attaining ruin than one who makes 10 trades. If he meant that the numbers reflected a theoretically infinite number of...
Good points... I think Chris is trying to illustrate that it is important to at least have some idea of what your win/loss ration is and your profit ratio before you decide what is a safe level to risk... the importance of keeping data on your performance.

Obviously we can only work on past performance and time can change everything... but really as traders we should have reached some sort of consistency before we even consider placing live trades.
tradewith60
  • #15
  • May 5, 2012 4:26pm May 5, 2012 4:26pm
Once you've studied the market in the minutest detail, you'll find that there is an absolute multitude of trade opportunities with just a 3 or 4 pip sl (I'd call them zero risk, but sudden fundies can always pop up and blow your stop).

These entries are very easy to find, and their first targets are just as easy to find. Watch the PA on the approach to the first tgs, and you'll get an idea of whether you're onto a runner or not. These trades can have massive rewards for almost, or literally, zero risk.

Just learn where to find them, and you'll never wonder about RR again

RR strategies smell alot like gambling. Learn how to read price, and you'll be trading alongside the market movers at every turn
  • #16
  • May 6, 2012 4:40am May 6, 2012 4:40am
Quoting Jack_Larkin
Right, the terminology was a little off and I can see how that might easy to mix up. When I say expectancy in the context of an 'edge', I mean something slightly different thank expectancy from a system/plan.

An edge, will give us a directional bias, and thus we 'expect' one outcome would be more likely than another.

Where as system expectancy is more about the resulting return for each unit risked over a large trade sample size.

Just to be clear.
So you suggest then that an edge is related to the win-rate alone? Since you write that one outcome is more likely (>50% chance) of happening than another.
A little short-sighted. You don't need to be right more than 50%. If I have a pattern that works out 30% of the time and gives me a reward 6 times as large as my risk, then this is as well an edge.
Also let me emphasize another point. Even if I had a pattern that is working out let's say 55% of the time, but if my reward is only half of the risk I take on each pattern, then guess what, you don't have an edge, cause that will eventually lead to account depletion.

And edge is always a function of win-loss & risk-reward.
  • #17
  • May 6, 2012 9:11am May 6, 2012 9:11am
Quoting Custos
So you suggest then that an edge is related to the win-rate alone? Since you write that one outcome is more likely (>50% chance) of happening than another.
A little short-sighted. You don't need to be right more than 50%. If I have a pattern that works out 30% of the time and gives me a reward 6 times as large as my risk, then this is as well an edge.
Also let me emphasize another point. Even if I had a pattern that is working out let's say 55% of the time, but if my reward is only half of the risk I take on each pattern, then guess what, you...
No where in my post did I say anything about win rate. Nowhere. Where are you pulling that from? Even the part you put in bold doesn't suggest this.

Why would expecting one outcome to be more likely than another (directioanl bias) automatically mean we're taking that direction? I didn't suggest this either.

Understand, I can tell you that I'm 70% sure the market will go down on a given day (my bias thanks to my understanding of the market, or edge) but I can be long knowing the expectancy of that trade will be greater than if I was short (which relates to my system.)

An edge that gives us a directional bias can lead to a valid system that takes the trade against the more probable direction should the reward for when the move fails be much greater than the reward for when it works... but you know this already.

I think the disconnect in understanding between us stems from the use of 'edge'. You believe an edge is the system itself, where as I believe an edge is a noticed signal (be it a patters, event, etc.. anything that gives us some sort of likely direction) and you then build a plan around it. I suppose neither of us are wrong depending on who's definition of edge you look up.

I just wanted to be clear since your post made a lot of suggestive remarks about things I didn't say.
FXGears.com
  • #18
  • May 6, 2012 10:17am May 6, 2012 10:17am
Quoting Jack_Larkin
No where in my post did I say anything about win rate. Nowhere. Where are you pulling that from? Even the part you put in bold doesn't suggest this.

Why would expecting one outcome to be more likely than another (directioanl bias) automatically mean we're taking that direction? I didn't suggest this either.

Understand, I can tell you that I'm 70% sure the market will go down on a given day (my bias thanks to my understanding of the market, or edge) but I can be long knowing the expectancy of that trade will be greater than if I was short (which...
and still I disagree. You don't need an outcome above 50% for a pattern to have an edge. Even if the directional bias is totally random, you can make a great system out of it, if the R:R compensates for it. If you disregard all the great patterns that don't give an obvious directional bias, but shoot for high pips each time, then you are missing great opportunities.

Well and if you say something is more likely to happen than something else, then that is effectively the win-rate, no matter how you put it.
  • #19
  • May 6, 2012 10:27am May 6, 2012 10:27am
Quoting Custos
and still I disagree. You don't need an outcome above 50% for a pattern to have an edge. Even if the directional bias is totally random, you can make a great system out of it, if the R:R compensates for it. If you disregard all the great patterns that don't give an obvious directional bias, but shoot for high pips each time, then you are missing great opportunities.

Well and if you say something is more likely to happen than something else, then that is effectively the win-rate, no matter how you put it.
Dude... again, I never said you needed a win rate of anything... I never said "win rate".. where are you reading this?

Did you even read the posts? ...'cause I'm thinking something's not clicking here.


Quoting Jack_Larkin
No where in my post did I say anything about win rate. Nowhere. Where are you pulling that from? Even the part you put in bold doesn't suggest this.

Why would expecting one outcome to be more likely than another (directioanl bias) automatically mean we're taking that direction? I didn't suggest this either.

Understand, I can tell you that I'm 70% sure the market will go down on a given day (my bias thanks to my understanding of the market, or edge) but I can be long knowing the expectancy of that trade will be greater than if I was short (which relates to my system.)

An edge that gives us a directional bias can lead to a valid system that takes the trade against the more probable direction should the reward for when the move fails be much greater than the reward for when it works... but you know this already.

I think the disconnect in understanding between us stems from the use of 'edge'. You believe an edge is the system itself, where as I believe an edge is a noticed signal (be it a patters, event, etc.. anything that gives us some sort of likely direction) and you then build a plan around it. I suppose neither of us are wrong depending on who's definition of edge you look up.

I just wanted to be clear since your post made a lot of suggestive remarks about things I didn't say.

I basically confirm what you're saying about the system and not needing 50%+ of a win rate (which again, you brought up, I never even suggested win rate before) to be profitable... and you again put words in my mouth that I suggest differently.

What's this really about? ... 'cause clearly isn't about some terminology misunderstanding. I've been pretty clear, in fact, I've even been polite about it giving you the benefit of the doubt in this as a misunderstanding.
FXGears.com
  • #20
  • May 6, 2012 10:37am May 6, 2012 10:37am
Quoting Jack_Larkin
Dude... again, I never said you needed a win rate of anything... I never said "win rate".. where are you reading this?

Did you even read the posts? ...'cause I'm thinking something's not clicking here.





I basically confirm what you're saying about the system and not needing 50%+ of a win rate (which again, you brought up, I never even suggested win rate before) to be profitable... and you again put words in my mouth that I suggest differently.

What's this really about? ... 'cause clearly isn't about some terminology misunderstanding. I've...
okay, then I am just not understanding your post, let's leave it at that.
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