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1:1 Risk Reward Ratio - Why it just makes sense

  • #221
  • Jun 11, 2012 2:24am Jun 11, 2012 2:24am
Quoting 2+2=4ex

An R:R of 1:1 can be profitable
Right, but if the market is offering a better reward then why would anyone purposely limit potential and cut profit short by only targeting 1:1? It wouldn't make sense.....


Quoting 2+2=4ex

Here's another myth... an RR of less than 1:1 cannot be profitable. Math shows it can be. The rate of winning trades would have to exponentially outnumber the loses as the RR 'worsens', but there is no golden rule that says it isn't possible. It's probably not a good idea to trade with an RR less than 1:1 because it puts less room for error on entries (since you have to win much more), but it can technically be done.
That puts the focus even more on predicting rather than trading.
  • #222
  • Jun 11, 2012 2:30am Jun 11, 2012 2:30am
Quoting pipmutt
Are you saying that anything goes as long as it makes money and is comfortable for the trader?
I am saying that it is futile trying to compare one trader to another ...whether it be an argument about RR or method or pairs or trading times.....whatever.......none if it can possibly be argued because we are all vastly different with different trading personalities and style. So whether or not you think your RR is better than a trader using 1:1 is meaningless....it works for you great...doesnt make it any better or worse than a method using 1:1. IT all depends on who is using it.
  • #223
  • Jun 11, 2012 2:31am Jun 11, 2012 2:31am
Quoting pipmutt
Right, but if the market is offering a better reward then why would anyone purposely limit their potential and cut profit short by only targeting 1:1? It wouldn't make sense.....
I agree. Not saying either one is a good idea or bad idea. Will 1:1 RR be more profitable over a year as opposed to letting winners run? Again, no one knows. Some years might have 1:1 RR more profitable if the trader played the range correctly. Other years may have seen a strong trend where a trader closed out their trades for an overall average of 3:1 per trade.

The question becomes how many times will a trader let profits run only to find that price retraces and closes out for a loss or breakeven? How many more times will the 1:1 RR guy hit take profit over stop loss? Will it profit more than the guy with lower winning percentage but higher RR? These are all questions no one can answer without knowing what price will do.
  • #224
  • Jun 11, 2012 2:37am Jun 11, 2012 2:37am
Quoting 2+2=4ex
I agree. Not saying either one is a good idea or bad idea. Will 1:1 RR be more profitable over a year as opposed to letting winners run? Again, no one knows. Some years might have 1:1 RR more profitable if the trader played the range correctly. Other years may have seen a strong trend where a trader closed out their trades for an overall average of 3:1 per trade.

The question becomes how many times will a trader let profits run only to find that price retraces and closes out for a loss or breakeven? How many more times will the 1:1 RR guy hit...
The only thing we know for certain in order to make profit is buy low and sell high. And all we can control is how much we're willing to take as a loss when proven wrong. Combine those two correctly and you will most probably survive long enough to make a return.
  • #225
  • Jun 11, 2012 2:37am Jun 11, 2012 2:37am
Quoting darko2010
Dean,

You are right in the sense that anyone can have their own strategy provided it works for them. However, I was under the impression that threads such as this one were used to confront views in order to help the community through individual experiences and, when necessary, disagree with certain strategies.

I am sure a pre-established R&R strategy of 1 can work, I am merely pointing out that I don't believe this is the best use of one's time and money in a market which, even if it has its chaotic moments, has a direction.

So, just to clarify,...
Please dont take it as criticism. AS per your post, you are trading a trend strategy and along with that obviously goes a let it run attitude....and again...thats all cool becaseu it works for you....but as you mention...others may be trading different elements of the market....ranging etc...and have just as much success with 1:1....you simply cant make the determination that your method is more optimal than another....at the end of the day....what is the marker for success in all this.......its who has made the most money.
  • #226
  • Jun 11, 2012 2:41am Jun 11, 2012 2:41am
Quoting 2+2=4ex

These are all questions no one can answer without knowing what price will do.
Right, so as traders we can only react to what price is doing and try to limit our risk and maximise our gain by taking full advantage when opportunities presents themselves. That's not going to happen if we insist on cutting profits short regardless of what the market is offering us.
  • #227
  • Jun 11, 2012 2:44am Jun 11, 2012 2:44am
Quoting pipmutt
Right, but if the market is offering a better reward then why would anyone purposely limit potential and cut profit short by only targeting 1:1? It wouldn't make sense.....

There is ALWAYS a new trade.....maybe the 1:1 trader just has more of them.....there are many possibilities and reasons as to why...again its not necessarily limiting potential...its just THEIR method of trading...and if its succesful for THEM thats all that matters.


That puts the focus even more on predicting rather than trading.
Every trade entered into has an element of prediction.....regardless of your method whether it be using indicators or candles or whatever.....once you decide to enter that trade you are placing an element of prediction as to the direction of price.
  • #228
  • Edited 2:58am Jun 11, 2012 2:48am | Edited 2:58am
Quoting dean

...what is the marker for success in all this.......its who has made the most money.
Not at all, it's all about performance, return for risk, that's the yardstick used in finance when assessing any investment or speculation, not who made the most money.


Quoting dean

Every trade entered into has an element of prediction.....regardless of your method whether it be using indicators or candles or whatever.....once you decide to enter that trade you are placing an element of prediction as to the direction of price.
Sure, but the higher your win rate needs to be to compensate for poor risk:reward, the more times you need to be right and the sharper your accuracy at predicting needs to be.

I've put that very awkwardly, I think Soros's quote in my sig says it best...."It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."

Anyway we're straying right off the subject here, why purposely limit yourself to 1:1 if the market offers more?
  • #229
  • Jun 11, 2012 2:49am Jun 11, 2012 2:49am
Quoting pipmutt
Right, so as traders we can only react to what price is doing and try to limit our risk and maximise our gain by taking full advantage when opportunities presents themselves. That's not going to happen if we insist on cutting profits short regardless of what the market is offering us.
Have you ever heard of the quote, "I got rich by selling too soon"?
Be careful, the market will kick your ass if your greedy.
  • #230
  • Jun 11, 2012 2:50am Jun 11, 2012 2:50am
Quoting pipmutt
Right, so as traders we can only react to what price is doing and try to limit our risk and maximise our gain by taking full advantage when opportunities presents themselves. That's not going to happen if we insist on cutting profits short regardless of what the market is offering us.
Yes we limit the risk (loss). That's not the topic. The topic in question is which method is more profitable? My logic tells me that it can't be answered because we don't know how many times price is going to zig zag in a range or even in a trend. Assuming both methods were equally profitable, logic also suggests that the trend trader that lets profits run will probably have a handful of winning trades with many more losses. Where the 1:1 RR trader will have more wins than losses with each profitable trade being much less than the trend traders profitable trades.

With that said, I find that I trade mostly with the long term trend unless I have a reason not too. And my entries and exits are where they make sense to me. I don't use a formula or fixed RR. Nor do I always close all or let it run. Sometimes I let part of it run, sometimes all of it, sometimes none of it (close all).
  • #231
  • Jun 11, 2012 2:51am Jun 11, 2012 2:51am
I think the fault resides in the original post of this thread where roofx has been very generic in his affirmations. A RR of 1 works, so do other RRs and, in some cases, a pre-set RR is not recommended.

Like any argument which has faulty premises and the answer to which is more dependent on the person who answers rather than the question itself, I will take my leave and wish you success for your trades.

Best,
D
  • #232
  • Jun 11, 2012 3:00am Jun 11, 2012 3:00am
Quoting pipmutt
Not at all, it's all about performance, return for risk, that's the yardstick used in finance when assessing any investment or speculation, not who made the most money.

Sure....and an investment that has performed well equates to more dividend income or more value in your stock....forex it equates to more money in your account.


Sure, but the higher your win rate needs to be to compensate for poor risk:reward, the more times you need to be right and the sharper your accuracy at predicting needs to be.

We're straying right off the subject...
Yep I agree....I was merely stating that trading does indeed require an element of prediction.
  • #233
  • Jun 11, 2012 3:12am Jun 11, 2012 3:12am
Sorry and he knows I don't like to say this but the Mutt is right.

Look at the amount of times the market moved many times your TP.

Also look at how often you get nearly to the TP and it reverses heading all the way back to your SL.

Ask yourself if you take whats given to you more or less than 1:1 would your account be better off, odds are it will be.

Same with the SL would you be better off if you tightened then SL.

Of course you will have times where you'd of been better off, but overall is what counts.

Ofcourse if you havent got the time to watch the market then 1:1 is all you can likely do although I'd be looking for setups with 2:1.
Nothing to it, but to do it!!! Stick to the plan FOOL!!!!
  • #234
  • Jun 11, 2012 3:13am Jun 11, 2012 3:13am
Quoting 2+2=4ex

Assuming both methods were equally profitable, logic also suggests that the trend trader that lets profits run will probably have a handful of winning trades with many more losses. Where the 1:1 RR trader will have more wins than losses with each profitable trade being much less than the trend traders profitable trades.
So in a market which can be volatile and unpredictable one approach maximises profit when it gets direction right and the other relies more on getting it right more often than wrong. I guess the question then is are we predominantly in the predicting business or the trading business?
  • #235
  • Jun 11, 2012 3:54am Jun 11, 2012 3:54am
Quoting pipmutt
A very reasonably presented point of view but you know I'm not going to agree....

Is trading about being right and winning a trade or is it about making as much money as you can for the risks taken?

In a market over which you have no control and which can be volatile and unpredictable you have to be right more times than you're wrong to make a profit. That places more emphasis and reliance on your predictive abilities and more importantly on the market agreeing with your view, and every new trade is new exposure to risk. There are also the issues...
I have really been enjoying this thread, as it goes hand in hand with some research I have been doing.

I am not going to argue either way (at the moment :-D) I am only going to point out that one of the most successful day traders on wall street was famous for saying he is just happy hearing the cash bell ring... He is happy going for singles...

Have you guys read Pitbull by Marty Schwartz.... great book!
  • #236
  • Jun 11, 2012 4:55am Jun 11, 2012 4:55am
Quoting Nexas

I am only going to point out that one of the most successful day traders on wall street was famous for saying he is just happy hearing the cash bell ring... He is happy going for singles...
Wall St, different ball game entirely from what I've read/heard/seen, but maybe some comparisons?


Quoting Nexas

Have you guys read Pitbull by Marty Schwartz.... great book!
Nope but it seems to get rave reviews! Good book is it?


Quoting Nexas

some research I have been doing
And was it conclusive?
  • #237
  • Jun 11, 2012 5:55am Jun 11, 2012 5:55am
Hey Pipmutt,

Thanks for your reply. You may be right that it is a different bull game but for me anyway it is always useful to see different traders mindsets.

It is one of my top two favorite trading books! It doesn't give you any system but allows you to take a peek into the life of a successful trader, which for me is more valuable. It is very entertaining as well which is always a bonus.

How do you define conclusive :-) I have read other studies on the subject which all seem to come to the same conclusion and mine was no different. A more positive R&R leads to a more profitable return.

However this for me is the key... how many traders really, will be able to remain consistent to a system which gives them a strike rate of lets say below 50%?

Unfortunately the answer is a only a handful. So if they cannot remain consistent and take the trades when they set up after a draw down which is inevitable, then essentially they are changing the system and hence the edge. If the system says take a setup and they don't then suddenly they have altered the edge...

Where as I suspect the majority of retail traders anyway would opt for a worse risk reward but better strike rate. However because they could then remain consistent to the system they would actually end up better off than going for the home runs.

I am not saying it is right and indeed it has been shown to lower the dollar return on paper, but if you take into account the trader then in actual fact a better strike rate may be more profitable in reality...

Not trying to start any conflict :-) just offering up my thoughts.

Nexas
  • #238
  • Jun 11, 2012 6:12am Jun 11, 2012 6:12am
I'm still learning but in the trending market, for me it's better to take what market gives so if it;s 1:3, 1:4, 1:7 or greater RR I will take it, by 1 i meant small SL or for me Risk.
So better in my opinion is us trend line, fractals and MA in one time to find good answer where leave SL and get out by price- manual or by market- SL .
  • #239
  • Jun 11, 2012 6:13am Jun 11, 2012 6:13am
Quoting Nexas
Hey Pipmutt,

Thanks for your reply. You may be right that it is a different bull game but for me anyway it is always useful to see different traders mindsets.

It is one of my top two favorite trading books! It doesn't give you any system but allows you to take a peek into the life of a successful trader, which for me is more valuable. It is very entertaining as well which is always a bonus.

How do you define conclusive :-) I have read other studies on the subject which all seem to come to the same conclusion and mine was no different. A more...
You make some good points.

For me, trading as Pipmutt suggests which is to basically do what I've preached a lot about on this forum before which is trade the market and let it decide when to exit... I did this for a long while but in the end the market wasn't deciding anything. It was always me. I was a long time discretionary trader and recently tried to mechanicalize (I know that's not a word) my "system". The exit was the toughest to systematize but I came to the conclusion of shooting for the big ones and even taking smaller profits if I decided that was the right thing to do.

In the end it was very discretionary no matter which way I did it. Setting large set R:R makes no sense to me because in shooting for those large R:R targets you come more victim to the "market game" which involves a lot of discretion I believe. The stop hunts, shake outs, news, profit taking, market hours, session changeovers etc etc. The start of massive moves are the smoothest.

So at the end of my mechanization I've settled to increase my risk and take profits before these factors are more dominant on a move. This makes complete sense to me right now. For intra day trading that is.

Nothing has changed in my system or money management except earlier profit taking at higher risk per trade.

I will come back to this thread and be sure to let you all know how it went for me. I'm a massive fan of humble pie.. mmm

Second to all the above after taking a 1:1 there is nothing stopping me from jumping back in to a move if things look right. This is no different to adding to a trade I'm already in as I do anyway at various points when going for those big ones.

Oh yeah it's true it's true. I'm a guy... And a weirdo. Comes with the job.
Time hides Nothing
  • #240
  • Jun 11, 2012 6:46am Jun 11, 2012 6:46am
Suppose Fred buys at 10, stop at 9 and target at 11. Fred is convinced there is a greater than 50% chance it will go up.

Ok. Now the price reaches 11. Well done Fred. What will he do now? This decision point is no different to entering a second trade. Unless he has a good reason for thinking there is a better than 50% chance it will reach 12, he should take his profits at 11.

Basically, if Fred wouldn't open a new trade at 11, neither should he continue an old trade at 11. ie. you exit the moment you wouldn't enter.
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