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

  • #441
  • Jun 15, 2012 5:13pm Jun 15, 2012 5:13pm
Quoting Turveyd
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...
That seems really low even for swing trading on 4hr. 12% a year is 6 net positive trades a year if you risk 2% a trade. That's pathetic if you ask me for a whole year and everyone should aim higher unless they only want 12% on their 1 million dollar account.
  • #442
  • Jun 15, 2012 6:13pm Jun 15, 2012 6:13pm
Quoting misterboy
That seems really low even for swing trading on 4hr. 12% a year is 6 net positive trades a year if you risk 2% a trade. That's pathetic if you ask me for a whole year and everyone should aim higher unless they only want 12% on their 1 million dollar account.
H4 think 2 trades per week so 100 trades 53% win rate gives you 6 positive trades =12% it does work out.
Nothing to it, but to do it!!! Stick to the plan FOOL!!!!
  • #443
  • Jun 15, 2012 7:08pm Jun 15, 2012 7:08pm
Quoting Turveyd
H4 think 2 trades per week so 100 trades 53% win rate gives you 6 positive trades =12% it does work out.
Yes, true. With that accuracy and number of trades, 12% is what you can get. But I was just saying, with the 4hr charts you can take many more trades a year but just depends on your goals.
  • #444
  • Jun 15, 2012 7:13pm Jun 15, 2012 7:13pm
Quoting misterboy
Yes, true. With that accuracy and number of trades, 12% is what you can get. But I was just saying, with the 4hr charts you can take many more trades a year but just depends on your goals.
Not me claiming 12% its a lot of big traders does work out well with my H4 53% at best though.


Most of the H4 traders around have a m1 and slow scalp like everyone else so if they claim more ask if they have a M1 open.
Nothing to it, but to do it!!! Stick to the plan FOOL!!!!
  • #445
  • Jun 15, 2012 8:54pm Jun 15, 2012 8:54pm
FXCM is down can't run the weeks reports off ( new account, old info gone )

Win rate @70%, I'd bet average profit is @7pips and average loss 11pips, pretty much break even due to 10x's the desired leverage on oil, no Micro lots doh!!

Yes it's a work in progress, my small profits pretty much just cover SL losses.

The 5-10% of my trades go 30-100pips which gives me 3:1 or upto 10:1, which gives me a quick 10 - 30% account boost.

Without the odd 5:1 it's a very slow long winded game.
Nothing to it, but to do it!!! Stick to the plan FOOL!!!!
  • #446
  • Edited 3:09am Jun 16, 2012 2:34am | Edited 3:09am
Quoting M.A.C.Doug

the 1:1 trader will wipe the floor with any other r:r. He can risk more and compound faster because of a higher win rate.

Other advantages are psychological. A higher win rate and lower drawdown is easier to do psychologically and therefore lowers the risk of trader error

I don't understand the logic or the math behind those statements.

How can he risk more? One side of the ratio, risk, could be identical.

How can he compound faster? Unrealised profit is still profit which can be utilized.

How does a higher win rate using 1:1 have less drawdown than a lower win rate and better than 1:1? If anything the opposite is more likely to be true.

Why is there less risk of trader error? Again the opposite is more likely to be true as he trades more frequently.


Quoting M.A.C.Doug

Other advantages are psychological.
Yes they are, but not for your scenario. There's nothing better than watching a trade make money without any exposure to risk and profit being locked in as the trade develops, whereas every new trade has new exposure to risk. If the trader has psychological issues with trading and taking risk (which really need to be addressed and resolved) then risk free has simply got to be better than taking on new risk with his higher frequency of trades.


Quoting M.A.C.Doug

I can however use 1:1, trade in the wrong direction, have a high win rate, compound regularly, and milk 5% from a single session
Or.....you could trade in the right direction, let profits run, compound gains within a profitable open trade, and 'milk' 5% from a single trade. And all with the one initial risk which is reduced to zero with profits locked in as you go.


-
  • #447
  • Jun 16, 2012 3:18am Jun 16, 2012 3:18am
Quoting pipmutt

Or.....you could trade in the right direction, let profits run, compound gains within a profitable open trade, and 'milk' 5% from a single trade. And all with the one initial risk which is reduced to zero with profits locked in as you go.


-

I think what MAC_Doug is getting at is that the market it not just straight up or straight down.

If you "let profits run" there are many instances where you could close the profit at 1:1 and re-enter multiple times off the same wave. It's a different way to look at it, but quite often a pair that is trending on one time frame is range bound on another time frame.

"letting profits run" is IMHO broker fodder for "let those profits turn into losers." Obviously it depends greatly on the pair and the situation, but you know as well as I do markets are range bound upwards to 80-90% of the time.

The decieving factor is and always will be the size of the range.

You never go broke taking profits... only losses. Sounds so simple doesn't it?
  • #448
  • Jun 16, 2012 3:48am Jun 16, 2012 3:48am
Quoting pip_seeker

I think what MAC_Doug is getting at is that the market it not just straight up or straight down.
If you "let profits run" there are many instances where you could close the profit at 1:1 and re-enter multiple times off the same wave.
You could do, but why pay extra overhead, why take on new risk with every new entry, and why risk getting left behind if the market doesn't give you an opportunity to re-enter (retrace)? Especially when there's a simpler, more effective, and more productive way of trading, with better performance.


Quoting pip_seeker

"letting profits run" is IMHO broker fodder for "let those profits turn into losers."
Most if not all mainstream brøkers make money off spread and shade and benefit from in-house liquidity so it's not in their interest to advocate letting profits run thereby encouraging their customers to trade less frequently. They can't however go against what most professional traders advocate and suggest people cut profits short, they'd lose all credibility!

No one is suggesting allowing profitable trades to turn into losers.


Quoting pip_seeker

You never go broke taking profits...
lol, that's got to be one of the most basic misconceptions in trading!

By the way, are you visually impaired? I just wondered if that was the reason why you post in oversized font.
  • #449
  • Jun 16, 2012 4:26am Jun 16, 2012 4:26am
wich RR you use. basicly depends on your trading style/timeframe.
StopLoss is for none belivers... Trust the Gurus..
  • #450
  • Jun 16, 2012 4:27am Jun 16, 2012 4:27am
Quoting pipmutt
You could do, but why pay extra overhead, why take on new risk with every new entry, and why risk getting left behind if the market doesn't give you an opportunity to re-enter (retrace)? Especially when there's a simpler, more effective, and more productive way of trading, with better performance.




Most if not all mainstream brøkers make money off spread and shade and benefit from in-house liquidity so it's not in their interest to advocate letting profits run thereby encouraging their customers to trade less frequently. They can't however...
I agree with entering multiple times off the same wave reasons :-

1. The move back could be a trend reversal so for me it's better to take my profit on a stall / early into a turn down, then wait for S/R or a turn up to get back on the trend at a Lower price with less risk.

Only when it becomes a strong trend do I let it run confidence needs to be pretty high or you just get nickel and dimed by multiple sl hits.
Nothing to it, but to do it!!! Stick to the plan FOOL!!!!
  • #451
  • Jun 16, 2012 4:27am Jun 16, 2012 4:27am
Quoting pipmutt
You could do, but why pay extra overhead, why take on new risk with every new entry, and why risk getting left behind if the market doesn't give you an opportunity to re-enter (retrace)? Especially when there's a simpler, more effective, and more productive way of trading, with better performance.
Pay extra overhead? I guess you're referring to spread? I could write a novel on spread costs and it's really pointless to go into such conversations because you are talking about a specific cost to something that fluctuates. Unless you are paying commissions?

Risk? well I could say the same thing to the buy and hold or let profits run (evaporate) if you will. How much risk do you have to hold it and watch your profits evaporate? Risk that it doesn't retrace? Sure it's possible, but in doing so you are playing odds. 80-90% remember? (I like those odds.)

Simpler more productive? The market is quite big there is no wrong way to trade... provided you make money. It's only wrong if you lose.



Quoting pipmutt
Most if not all mainstream brøkers make money off spread and shade and benefit from in-house liquidity so it's not in their interest to advocate letting profits run thereby encouraging their customers to trade less frequently. They can't however go against what most professional traders advocate and suggest people cut profits short, they'd lose all credibility!

No one is suggesting allowing profitable trades to turn into losers.
True to a point, but given the fines and the hands caught in the cookie jar by multpile brokers to numerous to mention here really doesn't do a whole lot for their credibility wouldn't you say?

If they were so worried about their credibility they wouldn't be the lying, manipulating fools that most of them are. Keep your friends close and your broker closer. lol.



Quoting pipmutt
lol, that's got to be one of the most basic misconceptions in trading!

By the way, are you visually impaired? I just wondered if that was the reason why you post in oversized font.
Maybe from your view... but clearly hindsight can be a valuable teacher... because it repeats.

Not visually impaired yet. I just set the text one size larger because it's easier to read is all. I don't know why they have to make the text so small on the internet, it's not like we are printing this on paper. With all the ads they can afford the space don't ya think?
  • #452
  • Jun 16, 2012 4:28am Jun 16, 2012 4:28am
For those who argue... do a simple experiment. Take 50 last trades you made and do the math in excel spreadsheet.

1) when you exit all your position at 1:1
2) when you exit 50% at 1:1, move stop to breakeven and let other 50% to run with some trailing stop method.
.

You can do the same thing for 2:1, 3:1 or with any parameters you like. It's pretty easy to do it at FF with the Trade Explorer. You can see all your entry and exit points on the chart.
  • #453
  • Jun 16, 2012 7:41am Jun 16, 2012 7:41am
Quoting Roofx
The most common belief among Forex Factory Traders is that a 1:2 or higher RR is necessary for profitable trading.
Some "systems" (I hate this term) rely on a 1:1 RR. See Tom Demark's break-out system is a good example because profitable --at least for him--. The TP is predefined by the projection of the opposite swing through the trendline. The SL is the other side of this swing. That's roughly 1:1.

But asking the market to give you 100 because you risk 100. Non-sense!

Quoting Roofx
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.
This is right only in the micro structure (lowest time frames) or in congestion periods. It has been shown the market is not a Random Walk in general. Would be too easy: a 1D Markovian process always returns to the starting point: given enough time everybody could swing with no SL and always win!

Quoting Roofx
If we leave off transaction costs for a moment we can say that a 100 pip stop has about as much chance of hitting as a 100 pip Target. I myself pay about 1.2 pips total transaction cost per trade which is 1.2 % of the 100 pip target. Every win will net 98.8 pips and every loss will net -101.2 pips. So our system needs to have a small 2.4% edge to break even.
Anything more than that and we are into profit.

So, finding a pattern to enter on that is right 6 times out of 10, will give a total profit of +188 pips. Being right just 51 times in 100 nets...
OK, let's do maths! Under your conditions we have:

SL = -100 + spread = -101.2
TP = 100 - spread = 98.8
win/loss ratio = 51%
Expectancy = 0.51 * 98.8 - 0.49 * 101.2 = +80

My issue with this is
Total profit over 100 trades = 100 * 0.51 * 98.8 = 5038.8
Total loss over 100 trades = 100 * 0.49 * -102.1 = -4958.8

- Your losses sum up to 62 times more than your net profit. (4958.8 / 80 = 61.985)
- Your average drawdown is 50.2 times bigger than your average profit (4958.8 / 98.8 = 50.19).
- Your profit/loss ratio is 5038.8/4958.8 = 1.016 ~ 1 : This system mainly looses as much as it wins. This is a breakeven-er system with a slight tendancy to be profitable.
- Keep in mind the probability of 51% will fluctuate around this mean.
- That's 200 trades taken for a net of 80 pips only. Over-trading?
- You cannot trade with a risk higher than 2% of you account because 49.59 * 2% = 99.18 %.

Pushing this system to the limits with one trade per day max (we need a 100 pip move), that's a year of trading. That's a 50% drawdown in average which can reach 99.2%! That's a net profit of 80 pips.
Your 2% risk SL is 100 pips therefore 80 pips are 1.6%. Your account progresses 1.6% p.a.! What is your tax rate on this? My bank account is 1% per year, risk free. My 5 year old daughter has a 1.5% pa risk free, tax free, saving account! You perform worse than a 5 year kid :-)

No, the bottom line is not the most important. It must also make sense!

As a side note, 1:5 is not a high R:R. 1:50 is. Of course not using a 100pip SL ramdom entry. And you can be wrong 90% of the time! And yes it takes 3 months to grow 1200 pips. So what?
No greed. No fear. Just maths.
  • #454
  • Edited 9:05am Jun 16, 2012 8:48am | Edited 9:05am
Pipmutt wrote:


The wild unsubstantiated claim is your 60-70%. You of course need to claim that level of accuracy because your whole argument in support of 1:1 pivots around a high win:lose, but it's unsubstantiated. That's not to say that kind of accuracy isn't achievable but we certainly haven't seen anything to support your claim that you're achieving it. Without 60-70% your whole theory about 1:1 crumbles.

The purpose of the thread is not to try to prove my ability to do anything. You have turned it into that. It seems you got yourself lost from post one. Do try to keep up.

If your entire revelation and your argument in support of 1:1 is 'a 1:1 R:R with a high win:lose is profitable' then it really is a non issue, it's very basic math.

Yep, it's basic math and something many want-to-be/soon-to-be-traders keep missing. So why the big fuss, pipmutt? And why have you made this whole thing personal by challenging me to this and doubting me for that. It does not matter if I am making a billion dollars a day with my trading skills or losing a trillion. The purpose of the thread was to remind traders-in-the-making that a 1:1 RRR can be advantageous to trading and giving some examples of how and why. It's that simple.



Perhaps, but you've yet to mention your motive.

Incorrect. I have mentioned already, my motive for creating the thread and I am tired of repeating myself because you seem to have some inability to read correctly and understand simple sentences. Here, I will say it again. Slowly: I Roofx, have created this thread, to remind people that a 1:1 risk reward ratio, can increace the win percentage of certain trading methods and be beneficial to their performance. And that 1:2 or higher risk reward ratios are not the only risk reward ratios that can be used successfuly and profitably.

I will also say - so as not to invite any further complaints, drama or nonsense from you - the purpose of this thread is not, nor was it ever to prove anything about my own personal achievements or abilities as a trader. It also is not to give away, explain or teach my specific trading plan.

Do you need me to write that down for you so you don't forget?




The important part is not so much the benefits of 1:1 as the feasibility, is it viable.

I believe it is. This is my personal belief and not an invitation for you to challenge my personal beliefs.

Not without a high win:lose, which as I've mentioned before puts the focus on predicting market direction accurately more than on trading.

Yes I agree with you that predicting market direction is important (wow we agree, amazing). In order to successfully manage a 1:1 RRR one needs to get the direction right more than 50% of the time. But for me that is part of trading itself. The two are intertwined.

Ignoring Sharpe type ratios, your performance and returns are directly related to your ability (or otherwise) to predict what the market will do next, in the very short term seeing as you claim to be a scalper.

Yes, I agree with this also. High five.
  • #455
  • Jun 16, 2012 9:01am Jun 16, 2012 9:01am
Quoting PipMeUp
Some "systems" (I hate this term) rely on a 1:1 RR. See Tom Demark's break-out system is a good example because profitable --at least for him--. The TP is predefined by the projection of the opposite swing through the trendline. The SL is the other side of this swing. That's roughly 1:1.

But asking the market to give you 100 because you risk 100. Non-sense!


This is right only in the micro structure (lowest time frames) or in congestion periods. It has been shown the market is not a Random Walk in general. Would be too easy: a 1D Markovian...

Thanks for your contribution. You are right but please bear in mind that my 100/100 example was to make the numbers easier for the average reader. I have never set a 100 pip stop on a live accout in my life and actually trade the M1 with a fixed target of 10 pips per trade. I have a fixed stop set lower than 10 so that after commission my profits exactly match my losses to give me a 1:1 RRR. Spreads are very tight and commission is a fraction of a pip due to trade volume. I trade with a fixed lot size and increase it at the beginning of each month. My risk percentage starts at 1% and gets smaller and smaller as the account grows until I raise it back up to 1% (or as close as the lot size increments will allow) at the beginning of the next month by increasing the lot size.
  • #456
  • Jun 16, 2012 9:44am Jun 16, 2012 9:44am
Quoting Roofx

I Roofx, have created this thread, to remind people that a 1:1 risk reward ratio, can increace the win percentage of certain trading methods

In order to successfully manage a 1:1 RRR one needs to get the direction right more than 50% of the time.
Well hopefully any 'traders-in-the-making' will have enough sense to have worked that out for themselves (not that it needs much thinking about or working out!). Really, if they need reminding then they could well be in the wrong business!


Quoting Roofx

My risk percentage starts at 1% and gets smaller and smaller as the account grows until I raise it back up to 1% (or as close as the lot size increments will allow) at the beginning of the next month by increasing the lot size.
After all that talk about being able to compound faster it sounds like you're reverse compounding after each trade! You reduce trade size as you make money and then only once a month you compound??? How is that faster compounding than increasing size on each trade or within a trade?
  • #457
  • Jun 16, 2012 10:06am Jun 16, 2012 10:06am
Quoting pip_seeker

Pay extra overhead? I guess you're referring to spread?
Spread, slippage, shade, partial fills, commission (depending on brøker/market/size)


Quoting pip_seeker

Risk? well I could say the same thing to the buy and hold or let profits run (evaporate) if you will. How much risk do you have to hold it and watch your profits evaporate?
If you lock in profit then obviously no risk, and as far as watching profits evaporate it's the same story.

Quoting pip_seeker

Risk that it doesn't retrace? Sure it's possible, but in doing so you are playing odds. 80-90% remember? (I like those odds.)
80-90% odds of what? Price frequently moves in one direction, consolidates, and then has another leg in the same direction, without any meaningful retracement. (Incidentally from a price action and market participant perspective why do you think that happens? The question is relevant to this discussion.) If you're sitting there waiting for an opportunity to get back in and that opportunity doesn't present itself then you either get left behind or you get tempted to chase the market. Neither are good.


Quoting pip_seeker
The market is quite big there is no wrong way to trade... provided you make money. It's only wrong if you lose.
That's another misconception. Making money isn't the most important thing when assessing performance, it's how you make that money and the risk you took to make it which gauges performance. That's why I've suggested people calculate a Sharpe type ratio to measure their performance rather than bottom line dollars and cents or percentage.


Quoting pip_seeker

True to a point, but given the fines and the hands caught in the cookie jar by multpile brokers to numerous to mention here really doesn't do a whole lot for their credibility wouldn't you say?
Of course it doesn't but saying to customers 'cut profits short' would be just a little too blatant!


Quoting pip_seeker

If they were so worried about their credibility they wouldn't be the lying, manipulating fools that most of them are.
Lying and manipulating, sure, but fools? Hardly!


Quoting pip_seeker

I just set the text one size larger because it's easier to read is all. I don't know why they have to make the text so small on the internet, it's not like we are printing this on paper. With all the ads they can afford the space don't ya think?
Sounds like you need to adjust your screen resolution, or get screens that have a different native resolution.
  • #458
  • Edited 9:09pm Jun 16, 2012 12:18pm | Edited 9:09pm
You guy's keeping pipmutt busy! Let me know when my shifts on!

Quote
pipmutt
Clooney lookalike


And to pipmutt if George Clooney's head falls off for no apparent reason it's on you. LOL!
My trades are 100% profitable 65% of the time!
  • #459
  • Jun 16, 2012 12:56pm Jun 16, 2012 12:56pm
Quoting pipmutt
Spread, slippage, shade, partial fills, commission (depending on brøker/market/size)
But yet their credability is ok with you and you don't see these problems as blatant? lol. Mr Black meet Mr Kettle. lol.

Quoting pipmutt
If you lock in profit then obviously no risk, and as far as watching profits evaporate it's the same story.
You're kinda saying half truths because you list slippage as a cost but yet on the other hand you call a profit locked in? No such thing. The only profit that is locked in is a closed trade with profit in the account.

So let's be real ok?


Quoting pipmutt
80-90% odds of what? Price frequently moves in one direction, consolidates, and then has another leg in the same direction, without any meaningful retracement. (Incidentally from a price action and market participant perspective why do you think that happens? The question is relevant to this discussion.) If you're sitting there waiting for an opportunity to get back in and that opportunity doesn't present itself then you either get left behind or you get tempted to chase the market. Neither are good.
Ranges come in all shapes and sizes. The bigger the range the more likely price will stay in the range. 80-90% of the time markets are range bound. Obviously this depends on the chart you are looking at. If you only stay on one time period chart you probably would never realize this at all... and that's ok if and only if you are making $$. Poison xyz and Poison abc are two different poisons... but they both accomplish the same goal. Pick one. LOL.

I am not going to get every trade and I don't try to... I don't have to sit there and wait? Are you kidding? Automation is a beautiful thing.


Quoting pipmutt
That's another misconception. Making money isn't the most important thing when assessing performance, it's how you make that money and the risk you took to make it which gauges performance. That's why I've suggested people calculate a Sharpe type ratio to measure their performance rather than bottom line dollars and cents or percentage.
Initially making money is the only thing. Confidence has destroyed more traders than any one single thing... and you only get confidence in what you are doing by what? (I'll give you a hint: It's not LOSING. lol.


Quoting pipmutt
Of course it doesn't but saying to customers 'cut profits short' would be just a little too blatant!
There in lies the rub... I didn't say to "cut profits short"... I said taking profits never made anyone go broke. Will you miss some moves? Sure, but I am also sure you miss plenty of moves already... so what?



Quoting pipmutt
Lying and manipulating, sure, but fools? Hardly!
Plenty of fools... Refco, MF Global instantly pop into my mind. We could go further and mention Lehman Bros. Everybody loves a party. lol.



Quoting pipmutt
Sounds like you need to adjust your screen resolution, or get screens that have a different native resolution.
Nah, you're the one complaining... I've already made the necessary adjustments and I am fine with it. If you don't like it maybe you can adjust your resolution or get FF to up the text size one notch. Otherwise I can't help you.
  • #460
  • Jun 16, 2012 1:35pm Jun 16, 2012 1:35pm
Quoting pipmutt


After all that talk about being able to compound faster it sounds like you're reverse compounding after each trade! You reduce trade size as you make money and then only once a month you compound??? How is that faster compounding than increasing size on each trade or within a trade?
And again you have somehow failed to follow what is going on in the thread come up with useless nonsense. I never said anything about compounding. That was someone else. So your comment is a waste of time. Nothing new here. I suggest you go and entertain yourslef in another thread. I have already had requests by pm to block you on this thread. I can totally understand why.
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