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

  • #381
  • Jun 14, 2012 9:30am Jun 14, 2012 9:30am
you're assuming the same nr of losses for the 2 systems. higher winrate will generate less drawdowns. a 70% winrate will generate 3-4 loosing trades but a 40% will generate more than 8 bad trades in a drawdown period. monte carlo simulations are the best tool of analysing trading system parameters.
  • #382
  • Jun 14, 2012 9:35am Jun 14, 2012 9:35am
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 and totally in our control.
But 'reacting' is actually just looking into the past to try to guage what the future might hold. When you 'react' to the market you are reacting to old data to try to predict future data. Price action is based on looking at something that is old news.

When someone throws a ball towards us, we react to what is happening, but really what we are doing is studying old information, ie. what the ball has done just fractions of seconds ago, to predict what is about to happen, ie. what the ball has a high probability of doing a few fractions of seconds from now, so we can give ourselves a better chance of catching it.

"Don't predict, just react to the market" is a commonly thrown around term that many do not fully understand. Reacting to the market IS the act of trying to predict future events. Using price action for example, is an attempt to predict what the market has a higher probability of doing after a certain pattern or series of patterns has already occured.

Trading successfully is trying to predict future events.
  • #383
  • Jun 14, 2012 9:36am Jun 14, 2012 9:36am
Quoting pipmutt
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.




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...
Lol, well greed is good in the right situations I guess.

Hmm some things to think about.. Cheers
Time hides Nothing
  • #384
  • Jun 14, 2012 9:38am Jun 14, 2012 9:38am
Quoting Roofx
But 'reacting' is actually just looking into the past to try to guage what the future might hold. When you 'react' to the market you are reacting to old data to try to predict future data. Price action is based on looking at something that is old news.

When someone throws a ball towards us, we react to what is happening, but really what we are doing is studying old information, ie. what the ball has done just fractions of seconds ago, to predict what is about to happen, ie. what the ball has a high probability of doing a few fractions of...
Opening a trading account, clicking buy and getting up in the morning are also reactions. Works for me haha
Time hides Nothing
  • #385
  • Jun 14, 2012 9:40am Jun 14, 2012 9:40am
Quoting deltatrade
you're assuming the same nr of losses for the 2 systems. higher winrate will generate less drawdowns. a 70% winrate will generate 3-4 loosing trades but a 40% will generate more than 8 bad trades in a drawdown period. monte carlo simulations are the best tool of analysing trading system parameters.
You are right.

The question becomes:

1) Which will have a higher win rate? How would that be calculated without knowing the analysis/triggers/filters for each trade or some kind of stats of an account.

If we are talking solely about any entry without the expectancy ratio, trigger/filter/analysis behind the trade/system, then this discussion is futile.

These are just my views, you may disagree.

Cheers
  • #386
  • Jun 14, 2012 9:46am Jun 14, 2012 9:46am
Quoting neo1599

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.
Thanks for your comments about when the account takes consequtive losses, the same number of consequitve wins will not get the account to starting capital. I agree.

I disagree with the comment I have quoted above though. You dont have to be an elite trader to get a 60% hit rate. A child can do it, IF the RR ratio is set accordingly. If you use a 1 pip target and a 500 pip stop, your hit rate would be VERY high even with completely random entries. The relation between RR ratio and hit rate are crucial here and I keep ranting on about it but few seem to be grasping this. If people can't grasp this then discussion on the topic is pointless at this stage.

Please tell me someone here understands this concept that I am repeating again and again? Please!
  • #387
  • Jun 14, 2012 9:51am Jun 14, 2012 9:51am
Quoting neo1599
Hi

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.
This is an excellent point and it is true if one always trades a percentage of their current account balance for every trade. I actually use a fixed lot size for each trade and as the account grows, the risk percentage shrinks, until the beginning of the next month when I move it back up to the starting risk percentage. This allows for the possibility of a string of consecutive losses at the beginning of a given month and still being able to make every penny back once the same number of wins have been acheved. But your point is very good and I think you are the first to bring it up in this thread so thank you for that.
  • #388
  • Jun 14, 2012 9:51am Jun 14, 2012 9:51am
Quoting Roofx
Thanks for your comments about when the account takes consequtive losses, the same number of consequitve wins will not get the account to starting capital. I agree.

I disagree with the comment I have quoted above though. You dont have to be an elite trader to get a 60% hit rate. A child can do it, IF the RR ratio is set accordingly. If you use a 1 pip target and a 500 pip stop, your hit rate would be VERY high even with completely random entries. The relation between RR ratio and hit rate are crucial here and I keep ranting on about...
I agree with you there is a relation between RRR and "Hit Ratio". I dont think anyone will disagree with you on this.

Whether I think a 1:1 system works or not. Based on my trading it doesn't, may work with your trading style/system.

Have a good one.
  • #389
  • Jun 14, 2012 9:52am Jun 14, 2012 9:52am
Quoting neo1599
You are right.

The question becomes:

1) Which will have a higher win rate? How would that be calculated without knowing the analysis/triggers/filters for each trade or some kind of stats of an account.

If we are talking solely about any entry without the expectancy ratio, trigger/filter/analysis behind the trade/system, then this discussion is futile.

These are just my views, you may disagree.

Cheers
the best way to analize technical systems either discretionary either systematic is through big amounts of backtesting and also forward testing. forward testing is important especially for discretionary testing. the most amount of profit that you can make assuming there is an equall number of trades of those 2 systems is the one that has the lower drawdown. a high winrate has lower drawdown and you can risk more per trade because of this. i know traders who rely on high reward risk and succede but this is not my style of choice.
  • #390
  • Jun 14, 2012 9:53am Jun 14, 2012 9:53am
Quoting Roofx
But 'reacting' is actually just looking into the past to try to guage what the future might hold. When you 'react' to the market you are reacting to old data to try to predict future data. Price action is based on looking at something that is old news.

When someone throws a ball towards us, we react to what is happening, but really what we are doing is studying old information, ie. what the ball has done just fractions of seconds ago, to predict what is about to happen, ie. what the ball has a high probability of doing a few fractions of seconds...
THis is a great post.....100% spot on....and anyone who tries to tell you trading has nothing to do with prediction is talking rubbish. IT's using data from past events to attempt to predict an outcome
  • #391
  • Jun 14, 2012 9:55am Jun 14, 2012 9:55am
The problem with this thread is that everyone is stating something like it isn't already known. Everyone that trades for living knows this (everything stated in this thread) and it is written in almost 60%+ trading books.

26 pages of what is this thread about?
  • #392
  • Jun 14, 2012 9:57am Jun 14, 2012 9:57am
Quoting Roofx

Trading successfully is trying to predict future events.
Of course initially one has to have a directional bias, and tools to help form that bias which are usually based on previous data, but ultimately it's the market which decides direction, once we're in a trade all we can do is react.

Using your ball example. Say the ball was travelling faster than you anticipated and you didn't catch it by standing still, your reaction would be to run after it. Or if was travelling slower you might run towards it. You're reacting to what actually happened rather than making a fixed decision of standing in a particular spot in advance based on your anticipation of what might happen. Keeping your options open allows for more flexibility at the time and more probability of catching the ball if it doesn't do exactly as you expected.
  • #393
  • Jun 14, 2012 9:57am Jun 14, 2012 9:57am
Quoting neo1599
I agree with you there is a relation between RRR and "Hit Ratio". I dont think anyone will disagree with you on this.

Whether I think a 1:1 system works or not. Based on my trading it doesn't, may work with your trading style/system.

Have a good one.
Thank you Neo. Yes the trading style is a key factor too. I am specifically using this RR with a very short term scalping method.
  • #394
  • Jun 14, 2012 9:59am Jun 14, 2012 9:59am
Quoting Roofx
This is an excellent point and it is true if one always trades a percentage of their current account balance for every trade. I actually use a fixed lot size for each trade and as the account grows, the risk percentage shrinks, until the beginning of the next month when I move it back up to the starting risk percentage. This allows for the possibility of a string of consecutive losses at the beginning of a given month and still being able to make every penny back once the same number of wins have been acheved. But your point is very good and...
No problem.

Consider this:

Your system hits a no. of consecutive or 1 loosing trade at the beginning of the month.

You are still trading a fixed lot size, with a lower capital, so now if you have a loss again you will have a drawdown which is in proportion to the starting capital and not the capital left after 1st loosing trade. Higher percentage. Repeat the pattern over 3-4 trades and well you get the picture.

Only decreasing the risk when account capital increases leaves you open to the other side. Decreasing lot size with a drawdown is essential to avoid major drawdowns.

Have to go now. Hope you understand the point I am trying to make.

Best of luck.
  • #395
  • Edited 10:29am Jun 14, 2012 10:03am | Edited 10:29am
Quoting pipmutt
Of course initially one has to have a directional bias, and tools to help form that bias which are usually based on previous data, but ultimately it's the market which decides direction, once we're in a trade all we can do is react.

Using your ball example. Say the ball was travelling faster than you anticipated and you didn't catch it by standing still, your reaction would be to run after it. Or if was travelling slower you might run towards it. You're reacting to what actually happened rather than making a fixed decision in advance based on...
To run after the ball would mean to use past data to predict where the ball is going to land. And that is about as far as the analogy can go because once the ball lands it cannot be compared to trading. The market never lands wheras a ball eventually does and so you can go and pick it up with 100% certainty.

Trading is predicting. All this talk of "reacting instead of predicting" is widely misunderstood and thrown around incorrectly. It is just predicting on shorter scale. Once in a trade you make decisions of what to do next, to stay in, to move your stop, to exit etc. by analysing past data to try to predict future data.
  • #396
  • Jun 14, 2012 10:08am Jun 14, 2012 10:08am
Quoting Rikers
The problem with this thread is that everyone is stating something like it isn't already known. Everyone that trades for living knows this (everything stated in this thread) and it is written in almost 60%+ trading books.

26 pages of what is this thread about?
Just shooting the sh•t... Picking some brains, I actually don't know anything that's why I'm here.
Time hides Nothing
  • #397
  • Jun 14, 2012 10:14am Jun 14, 2012 10:14am
Quoting CindyXXXX
Just shooting the sh•t... Picking some brains, I actually don't know anything that's why I'm here.
haha nice one

any predictions on the trading landscape....I've heard from several traders that neural nets is a bust - over-optimization is killing them
  • #398
  • Jun 14, 2012 10:14am Jun 14, 2012 10:14am
Quoting Roofx

once the ball lands it cannot be compared to trading.
I was just using your analogy.

If you stick with your initial decision and don't move you won't catch it. If you react to what the ball is actually doing and move then there is more probability of catching it.


Quoting Roofx

Once in a trade you make decisions of what to do next, to stay in, to move your stop, to exit etc. by analysing past data to try to predict future data.
My point exactly! Whereas what you say you're doing is a fixed 1:1 in advance regardless of what the market is actually doing, telling you, or offering you.


Quoting Roofx

predicting on shorter scale
I think you're splitting hairs regarding predicting and reacting, one is generally regarded as predicting the future, the other as reaction to current circumstances. Semantics.
  • #399
  • Jun 14, 2012 10:57am Jun 14, 2012 10:57am
Quoting deltatrade
you're assuming the same nr of losses for the 2 systems. higher winrate will generate less drawdowns. a 70% winrate will generate 3-4 loosing trades but a 40% will generate more than 8 bad trades in a drawdown period. monte carlo simulations are the best tool of analysing trading system parameters.
lower R/R will also take twice as long to recoup the drawdowns
tradewith60
  • #400
  • Jun 14, 2012 10:57am Jun 14, 2012 10:57am
pipmutt wrote:

I was just using your analogy.

If you stick with your initial decision and don't move you won't catch it. If you react to what the ball is actually doing and move then there is more probability of catching it.

I disagree. You are assessing what the ball has done and using that past data on a very small time frame to predict what the ball is likely to do in order to have a higher chance of catching it. If time froze during the ball's motion and then you showed up on the scene, you would not be able to assess which direction the ball was travelling or how fast, in order to have a good chance of catching it. You would need to see past data to have a higher probability of predicting what it's going to do.




My point exactly! Whereas what you say you're doing is a fixed 1:1 in advance regardless of what the market is actually doing, telling you, or offering you.

Yes. Because of my edge and using a 1:1, the market hits my target more often than it hits my stop. It offers me 10 pips many times per day and so I take them. It does not offer me 1:2, 1:3 or 1:6 opportunities nearly as often and so I don't trade that way. I like to be focused and busy while I trade and then finsih for the day and get on with other aspects of my life. High hit rate + 1:1 RR is what works for me.



I think you're splitting hairs regarding predicting and reacting, one is generally regarded as predicting the future, the other as reaction to current circumstances. Semantics.

No. If we take your definitions then I too am reacting, not predicting. I react to what has happened on a small time frame and take trades that are more likely to work out than to lose. When profit gets to +10 I react by exiting the trade. Doing so is part of the reason y hit rate is high. If I let it run, many times it would come back on me and hit my stop or break even point. MY edge and entry method needs a 1:1 RR ratio.


It's predicting. It's reacting. It's trading.
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