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

  • #361
  • Jun 14, 2012 6:16am Jun 14, 2012 6:16am
Quoting pipmutt
Just explain that theory to me please.
With a fixed SL and TP and no wish to modify to adapt. Then the bigger the amount the longer your in and the more your open to randomness and news events, the reason for entry 2 hours down the line is likely no longer valid it likely didn't get to 100 pips up or down so then your just holding and hoping and we all know hope does not work.

When you get to 1000 SL TP area if the market has a long term direction you can likely do better as pseudo randomness likely won't stop you out but talking 6 month holds here.
Nothing to it, but to do it!!! Stick to the plan FOOL!!!!
  • #362
  • Jun 14, 2012 6:22am Jun 14, 2012 6:22am
Even with a 10 SL like I trade the reason for entry at times becomes irrelevant and it becomes a wait and see game.


That's is why everyone is H4 crazy M1 is to live, you make a mistake odds are you lose the trade and can do that many times in a row repeating the exact same mistake out of frustration. H4 with bigger TP SL becomes nearer and nearer a 50/50 game it's safe but for a small account holder you will never really get anywhere that's where the max 12% per year comes from, that's a good year for a proper H4 only swing trader.

Which with a million $ account Ofcourse is just fine for me $36 a year just won't cut it.
Nothing to it, but to do it!!! Stick to the plan FOOL!!!!
  • #363
  • Jun 14, 2012 6:26am Jun 14, 2012 6:26am
Quoting Turveyd
If your refering to me, I refuse to dumb it down and explain everything, only intelligent people need bother to read my posts.
As said by someone who can't spell 'you're', this made me chuckle. No offence, it just made me smile
  • #364
  • Jun 14, 2012 6:43am Jun 14, 2012 6:43am
Quoting Turveyd
Can you say that in a yoda voice LOL

And 1:1 only makes sense, cause it's easy you place your trade, you add 100 and set your TP, subtract 100 and set your SL, switch off and check back later, not rocket science or in any way clever / good.
It's a shame you don't understand some basic concepts of mathmatics before you start making statements like "1:1 is kinda stupid".

My 100TP & 100SL example at the beginning of this thread was simply to explain the mathmatics more easily. But it seems even that was lost on some. I actually apply this to a scalping method, targeting 10 pips per trade, risking exactly the same as I gain and the method has a higher than 50% hit rate. I have been scalping the M1 timeframe 5 days per week, full time, for just under 5 years and been using a method with 1:1 RR and high hit rate rather than a 1:2 with low hit rate for the past 6 months. This thread was created to remind people of the benefits of using a 1:1 RR instead of the ranted and raved about 1:2 or higher. For those who prefer a higher hit rate because it allow them to take more trades and keep more focused, this method can be for you. Remember that the RR is not the method itself, it is part of it. It only works when used inside a method that allows a high hit rate, and the RR is part of why a high hit rate is possible. A 1:10 RR will not allow a high hit rate.

What is stupid about a 1:1 RR applied to a system that gets a 60-70% hit rate? Is making money stupid to you? Do you not understand how risk reward ratios relate to win/loss ratios? It seems like you don't. And if that is the case, you're going to need to go back to basics before a career in trading will be a possibility.
  • #365
  • Jun 14, 2012 6:44am Jun 14, 2012 6:44am
Quoting dean
Yes I am sure......many traders succesfully use martingale and averaging amongst others....its common knowledge that almost any method can be fine tuned to be succesful provided th person using it has the discipline and psychological demons sorted out. I dont dismiss anyones trading method. Its just the traders with overinflated egos that cant get that system to work for them feel the need to criticise it and tell the world there is no way it can work. Same old shit mate...just becasue YOU cant get it to work for you doesnt mean it wont...
My 2c, FWIW:

Agree that just because one trader can't get an indicator or line study to work profitably for him, it doesn't mean that nobody else can use it successfully. Unless one has infinite knowledge, it's impossible to state categorically that a particular tool can not possibly work.

Ultimately it's how one uses the available tools, interprets the market, and puts all of the pieces of the methodology together. There are many roads that can potentially lead to Rome (and even more that don't). Also, after a trader finds a methodology that works profitably for him, there's little incentive for him to continue investigating elsewhere, hence his focus tends to narrow, and he can become dismissive of other ideas.

However, I don't believe that any method can work profitably merely because the trader gets his psychological demons sorted. EAs trade with perfect discipline, but not every EA is long term profitable.

That's not to say that discipline isn't crucial. To what ever extent ill-discipline prevents a trader from executing his strategy consistently, the strategy becomes worthless.

IMO it's important to understand the difference between method and MM. Method (entries and exits) can deliver an edge, but MM merely re-balances return and risk, and/or redistributes wins and losses. MM is pure math, and consequently applies to trading just as it does to other games of chance. Just as the punter needs a gameplay-based edge (like counting cards in Blackjack) to beat the casino, the trader needs a methodological edge (entries and exits) to beat the market.

Martingale, hedging, scaling in/out, etc are all MM variants that are, in themselves, impotent. People say that Martingale works — of course it does, because the in-built recovery system is designed to ensure that every set of trades eventually returns to break even — until the situation occurs when the position sizes escalate to the point that a margin call occurs. Some of the more benign Martingales can deliver profit for several months, even years, before the 'death sequence' occurs. Every working Martingale is merely one that hasn't yet hit this sequence.
  • #366
  • Jun 14, 2012 6:51am Jun 14, 2012 6:51am
great conversation of topic,

ive been thinking about this r/r ratio .ive thought about how it would effect my trading style,and for me it would be unwise.my method is as descresionary as one can get,i rely on the flexibility to close trades anywere from -pips to large + pips,my stops are generally fixed but also need to adapt to my entries.
this flexibility overall gives me a reasonble positive average.if i incorperated a set take profit at 1;1 r/r my method would rely upon luck.

now im not condeming 1;1 r/r methods,but with trading being such a unpredictable journey of price to its fixed points,i find it hard to see how having such a controled element in a somwhat chaotic structure long term it must be hard to win.not sugesting it cant ,but this ilistrates how both sides of this coin find it hard to except the opposing traders views.

im sure most when entering a given trade have some idea as to were they would like to concider taking some profit.which would sugest a fixed veiw,but i for one look for entry to atleast hope to gain much more than 1;1.

now on the otherside of the cion,a trader who has carved out a method with the corect hit rate to make 1;1 r/r work,cant adjust his goal posts as this altimatly would efect the overall outcome.

just thinking aloud on this one
  • #367
  • Jun 14, 2012 7:19am Jun 14, 2012 7:19am
Quoting diceman555
if i incorperated a set take profit at 1;1 r/r my method would rely upon luck.
That would mean you would have no edge in getting the direction correct, in which case you should not be trading yet at all. As many here seem to be ignoring (or just missing), you need to have an edge before you even look at any kind of RR ratio. I think some in this thread are forgetting that. But I agree with some of your other points very much.

What's better: A 1:2 Risk Reward Ratio applied to a method that has a 35% hit rate or a 1:1 Risk Reward Ratio applied to a method that has a 70% hit rate? The answer is neither. They both yield the same profit.
  • #368
  • Jun 14, 2012 7:45am Jun 14, 2012 7:45am
Quoting hanover
My 2c, FWIW:

Agree that just because one trader can't get an indicator or line study to work profitably for him, it doesn't mean that nobody else can use it successfully. Unless one has infinite knowledge, it's impossible to state categorically that a particular tool can not possibly work.

Ultimately it's how one uses the available tools, interprets the market, and puts all of the pieces of the methodology together. There are many roads that can potentially lead to Rome (and even more that don't). Also, after a trader finds a methodology that...
Yes point taken in regards to the EA and discipline. I agree. I guess the basis of my post was that old saying.....a good trader can take a ordinary system and trade it profitably and an ordinary trader can take a great system and lose money. Luckily 99% of the people on this thread are open minded and accept other people's perspectives adn realise that their method is not the only way to trade. THe other 1% is simply a close minded trouble maker with no real understanding of the multitude of variants in trading. I find it bizzarre that someone of so much self professed logic can completely dismiss other trader's methods. Having a rigid or fixed method of trading in a market that is dynamic is foolish....it inhibits adaptibility.
  • #369
  • Jun 14, 2012 7:50am Jun 14, 2012 7:50am
What's better: A 1:2 Risk Reward Ratio applied to a method that has a 35% hit rate or a 1:1 Risk Reward Ratio applied to a method that has a 70% hit rate? The answer is neither. They both yield the same profit.[/quote]
Well said.....
  • #370
  • Edited 8:27am Jun 14, 2012 7:53am | Edited 8:27am
Quoting hanover

Agree that just because one trader can't get an indicator or line study to work profitably for him, it doesn't mean that nobody else can use it successfully.
Agreed, I've always said that nearly every system or strategy has some degree of merit and potential, but we're not talking about indicators or line studies.


Quoting hanover

MM is pure math, and consequently applies to trading just as it does to other games of chance. Just as the punter needs a gameplay-based edge (like counting cards in Blackjack) to beat the casino, the trader needs a methodological edge (entries and exits) to beat the market.
I suppose it depends on whether you view the market as an adversary or an ally, a competitor to beat or a vehicle which offers opportunities to make money.

Comparing trading to casino games is slightly illogical though, a trade doesn't have the same limitations and offers the trader far more flexibility than casinos and casino games offer the gambler.


Quoting hanover
Martingale, hedging, scaling in/out, etc are all MM variants that are, in themselves, impotent. People say that Martingale works — of course it does, because the in-built recovery system is designed to ensure that every set of trades eventually returns to break even — until the situation occurs when the position sizes escalate to the point that a margin call occurs. Some of the more benign Martingales can deliver profit for several months, even years, before the 'death sequence' occurs. Every working Martingale is merely one that hasn't...
Someone could use your same indicator and line study argument against you here......

"just because one trader can't get an indicator or line study to work profitably for him, it doesn't mean that nobody else can use it successfully."

My point being that, as you've pointed out, some things are just so obviously not optimal for trading.
  • #371
  • Edited 8:11am Jun 14, 2012 7:54am | Edited 8:11am
Quoting Roofx

That would mean you would have no edge in getting the direction correct, in which case you should not be trading yet at all.
So in a market which can be volatile and unpredictable one approach maximises profit when it gets direction right and the other relies 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?

Or are you saying trading and predicting are one and the same?

Even though he trades a different game you might want to consider the wisdom in Soros's quote in my sig, it's equally applicable......

↓
  • #372
  • Jun 14, 2012 8:30am Jun 14, 2012 8:30am
[quote=Roofx;5760215]That would mean you would have no edge in getting the direction correct, in which case you should not be trading yet at all. As many here seem to be ignoring (or just missing), you need to have an edge before you even look at any kind of RR ratio. I think some in this thread are forgetting that. But I agree with some of your other points very much.
this is the problem with forum debate,i have tried to look at this topic from both sides and can see merit or requirment for fixed 1;1 ratio trading strats,although i stated i would not make money employing 1;1.i trade price and price dictates at any given moment what decision i should make.ther lies my edge,i read price and take what price offers me.if i had fixed rr,i would not get the average of the positive.

your asking those to except your R/R and maths and yet your also being very opinionated .
  • #373
  • Jun 14, 2012 8:41am Jun 14, 2012 8:41am
Quoting diceman555

i trade price and price dictates at any given moment what decision i should make.ther lies my edge,i read price and take what price offers me.
And that's trading. We can't control the market, the only thing we can do and be totally in control of is reacting to what the market does, regardless of whether we're right or wrong about where we thought price would probably go. Predicting puts way too much reliance on the market agreeing with us, reacting puts the ball squarely in our court and totally in our control.
  • #374
  • Jun 14, 2012 8:51am Jun 14, 2012 8:51am
Quoting pipmutt
And that's trading. We can't control the market, the only thing we can do and be totally in control of is reacting to what the market does, regardless of whether we're right or wrong about where we thought price would probably go. Predicting puts way too much reliance on the market agreeing with us, reacting puts the ball squarely in our court.
Is there an example of a trade you could give us Pipmutt, like just describe a scenario on how you would manage your trade?

My dilemma is I can pick very consistently the market will go from A to B if X happens. So my 1:1 theory was that if I add a few times I won't have to wait all the way to "B" I can "tailor" the trade to make the same profit but before the market hits "B" if you know what I mean.

But as I'm finding particularly in these whipsawing markets is that as soon as I average in it just leaves me open to shake outs. Also (a psychological affect) As soon as I increase my risk I'm inclined to widen my stop which has all sorts of ridiculous affects on my whole shiz.

Previously I would trade in a way that aims to break "B" and then reap the big R:R.

There's just so many ways to skin the cat. It does my head in.

But all this said I think what I will do is just trade to "B" as a fixed target. Not increase risk and perhaps just add less aggressively with a tighter SL. It's all I got right now. Whatever profit I make I make.

I think my problem is greed as much as I hate to admit it.
Time hides Nothing
  • #375
  • Jun 14, 2012 8:53am Jun 14, 2012 8:53am
Quoting hanover
My 2c, FWIW:

Agree that just because one trader can't get an indicator or line study to work profitably for him, it doesn't mean that nobody else can use it successfully. Unless one has infinite knowledge, it's impossible to state categorically that a particular tool can not possibly work.

Ultimately it's how one uses the available tools, interprets the market, and puts all of the pieces of the methodology together. There are many roads that can potentially lead to Rome (and even more that don't). Also, after a trader finds a methodology that...
NP
Time hides Nothing
  • #376
  • Jun 14, 2012 8:54am Jun 14, 2012 8:54am
Quoting dean
What's better: A 1:2 Risk Reward Ratio applied to a method that has a 35% hit rate or a 1:1 Risk Reward Ratio applied to a method that has a 70% hit rate? The answer is neither. They both yield the same profit.
if you do monte carlo simulations on those systems you will see that one is superior to another. one sistem has far less massive drawdowns in 100 trades and can be used with a greater amount of risk/trade.
  • #377
  • Jun 14, 2012 8:55am Jun 14, 2012 8:55am
Quoting Roofx
The most common belief among Forex Factory Traders is that a 1:2 or higher RR is necessary for profitable trading. People who say this often are under the misunderstanding that there is a 50% chance of the market hitting their SL and a 50% chance of it hitting their target. Well a basic understanding of trading and simple mathematics would show that there is a lower chance of price hitting +20 pips than hitting -10. Many traders think if they can come up with a sytem that has a very slight edge then this 1:2 or higher RR will be what makes them...
Hi

While I agree with your math. You must consider expectancy ratio.

I haven't read the thread, just responding to opening post.

I am not going to do the math here. Just giving you an example:

If in 1:1 system, the number of consecutive loosing positions is 3-4, then the capital left to trade, will be much lower, so now even if you were to get 3-4 winning trades the percentage will not get you to starting capital.

Again I have no idea about starting capital here or the kind of risk-management/money management that will be run on the account.

Same scenario: 3-4 loosing trades with a 1:2(I take higher RR entries, just assuming what you have posted) risk reward, after which 3-4 profitable trades with 1:2 ratio. It will not only take me to starting capital but a higher capital level.

I assure you the no. of entries every week that you can find with ratio better than 1:2 is huge. Not all need to be winners but with 1:1 system it is very hard to be profitable over the long-run.

Consider this, if you can have a 60%+ profitable trades ratio you are among the elite traders. Most traders have a lower profitable trades average but profit from profitable trades more than covers the looses and leaves profit on original/compounded capital.
  • #378
  • Jun 14, 2012 8:59am Jun 14, 2012 8:59am
Quoting neo1599
Hi

While I agree with your math. You must consider expectancy ratio.

I haven't read the thread, just responding to opening post.

I am not going to do the math here. Just giving you an example:

If in 1:1 system, the number of consecutive loosing positions is 3-4, then the capital left to trade, will be much lower, so now even if you were to get 3-4 winning trades the percentage will not get you to starting capital.

Again I have no idea about starting capital here or the kind of risk-management/money management that will be run on the account.

Same...
very very bad math. are you some kind of a beginner ?
  • #379
  • Jun 14, 2012 9:06am Jun 14, 2012 9:06am
Quoting deltatrade
very very bad math. are you some kind of a beginner ?

Which part don't you agree with?

As for math, I didn't do any math in the post.

I still consider myself a beginner, just been trading almost 10 years. Profitably for the past few.
  • #380
  • Jun 14, 2012 9:27am Jun 14, 2012 9:27am
Quoting CindyXXXX

Is there an example of a trade you could give us Pipmutt, like just describe a scenario on how you would manage your trade?
Only in very general terms as each trade is different according to the market. My whole aim is to make as much as I can with as little risk as possible, by reducing risk as soon as is practicable and then using gains within a profitable trade to cover the risk on added positions. Ideally it's possible to end up with a (decent sized) open position which has no risk.


Quoting CindyXXXX

But all this said I think what I will do is just trade to X as a fixed target. Not increase risk and perhaps just add less aggressively with a tighter SL. It's all I got right now. Whatever profit I make I make.
Well increasing profit potential without increasing risk would obviously be optimal when the market offers it......which kind of brings me back to my original argument about limiting that potential to 1:1.


Quoting CindyXXXX

I think my problem is greed as much as I hate to admit it.
I think we're all 'guilty' of greed otherwise why else would we bother to trade or even go to work? I don't know about other countries but in the UK we have a perfectly adequate social security system and free health care, but most people have ambitions beyond what that offers, understandably they're greedy for more than just surviving.
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