Help Me With This Doubt - Risk/Reward Strategies

(from a scalpers perspective)

R:R is mostly important in swing trades and something below 50% prob. When you trade short term like scalping most of your R:R is a function of the market. Markets are moved by professionals that don't want to lose so it is more important to know where to hide your SL and not to overextend the TP.

Your expectancy is governed by:

entry - chance of your entry to be executed (limit order or even if you use market every market order can be looked as a placed stop order)
take profit - chance of the price moving to the tp
stop loss - chance of the price to hit sl before hitting tp

after you know these three elements (or at least their estimations) calculate your risk/reward and asses if the trade is worth taking. Not the other way around. As noted before you can't just decide how much reward you would like.

Better spend your time understanding what the market is doing like asking the questions:

1. are here mostly limit orders or stop orders?
2. is currently market overextending or in balance like in a tight range?
3. who is most likely to take the other side of my trade: scalpers or swing traders?
4. where do professionals expect to take profit or get out of a bad trade if it goes against them?

etc...

Firstly, I'd like to thank all you guys for sharing your opinions and ideas about this fascinating subject, and Rikers, you've got an excellent point here. But how can one calculates his/her risk/reward by these three points ? I mean, do you know how to calculate it ?

My worries lie on the fact that if you put a short TP, your chances of being successful are higher (this is the good aspect); on the other hand, according with my understanding, if you put this kind of TP, you'll have to have an even shorter SL, so in this case, you don't allow much room for the market to move (which can cause your SL to be hit, to almost immediately go back and follow the direction you were before you being hit in your SL - and this is the bad aspect). How to solve this equation is the 1 million dollar question.

Regards,
MrJinks.

This is a good question because if you handle it the wrong way you will loose with a high probability. The risk/reward ratio can not be defined ex ante - only ex post. It is not an input variable but a result. Things get worse if you think that your stop loss to profit target ratio is the same as a risk/reward ratio. Successful trading means to balance out the relevant input variables (entry signal parameter, exit signal parameter, stop loss level, margin and account balance etc.) in order to optimize specific output parameter (performance, draw-down and risk reward ratio etc.). If you want to earn money you have to be clear what the input parameter are and what the output parameter of your trading model are. Regards

Determent where the price is likely to go. look for natural support/demand/supply of liquidity.... after that look how fast did price stay in that area before moving out

unfortunately entry price execution percentage can only be assessed with backtesting. for SL, and TP look how far you expect for price to fall/rally until it hits some major S/R and where you can put your SL. This will give you approximate R:R, and the timing analysis will give you an overall indication on the chance of movement in your direction....

most of the analysis is by market conditions, not determining in advance R:R ratio....

there are also an option you don't put fixed TP/SL but exit after a period of time, or forcing an exit after a predetermined period if your TP is not hit

Rikers, I am demoing your suggestion (SL time based) and it seems to work better than the usual way. As far as there liquidity on markets, the statistical probabilities show their best results. Thank you for your awesome tip.

Regards,
MrJinks.